Why Bankruptcy is a good system.

Our forefathers decided that we would not have debtor’s prisons. We allow people in the US to file bankruptcy because we believe that everyone deserves a second chance. We have faith that some of these individuals will take advantage of the new chance and rise to levels of personal or financial success not possible before. We allow people to file bankruptcy because we can imagine the struggle of being stuck in a hole we couldn’t get out of. We do not want to suppress those who have fallen on hard times. The purpose of the law is to lift the individual up and give him or her a second chance to succeed.

The credit card companies argue that they are losing a great deal of money and that they should not bear the brunt of the losses. They are not, contrary to belief, losing money. The losses these companies suffer when an individual files bankruptcy are built into the interest rates they charge. They know a certain percent of individuals will file and that is why they charge the rates they do. The last time I checked the profit & loss statement of Chase Manhattan Bank, Citibank, Wells Fargo, etc., their profits were measured in millions.

The true cost of bankruptcy to the society is the higher interest rates we pay for our debt. This margin is built in to pay for those who cannot repay their debt. This cost to everyone who borrows is the slightly higher interest rate than we would otherwise see. It operates similarly to an insurance policy. The benefit of the “policy” is that it allows entrepreneurs to take on a higher level of risk because they know that if they fail, there is the last resort of filing bankruptcy. This means that more small businesses are started- and small businesses are the backbone of our economy. It is worth noting (to those that claim they should not have to pay higher interest rates because of others who can’t pay their debts) that if you do not want to pay the cost of the bankruptcy system, you do not have to – don't borrow.

When a person has a great deal of debt, they end up sending the vast majority of their disposable income to the banks. Without bankruptcy, very little of this individual’s money would ever make it into the economy. It would all be going to the banks every month. When an individual files bankruptcy, the flow of money is changed. The person puts his money back into the economy when he buys goods and services, and this benefits the economy as a whole – not just the banks.

If you do decide to file bankruptcy, you are in good company. Thomas Jefferson, Larry King and A be Lincoln have also filed. Do so with respect for the system our forefathers designed, not with guilt. Do so with the resolution that you will take your fresh start and make it of good use to yourself, your family and our economy. We wish you good luck and a promising financial future!