Friday, September 25, 2015

Musings on Bankruptcy and Donald Trump

I've been thinking a lot about bankruptcy lately. Obviously, part of that is because I'm a bankruptcy attorney, but it's also been coming up a lot in the news.

At the last Republican primary debate, Carly Fiorina fired shots at Donald Trump, saying that he had filed for bankruptcy four times. Trump responded, disingenuously, that he had never filed for bankruptcy. Trump's statement was technically true, but he knew what Fiorina meant, and what she meant was also true: Donald Trump has caused businesses he owns to file voluntary petitions under the Bankruptcy Code on four occasions.

A presidential debate, sadly, is not the place for nuance, but this blog will give you some after the jump:

On four occasions, Donald Trump has signed papers that helped businesses he owned back out on some of the agreements they had made, usually reducing his personal stake in the business and putting up substantial assets of his own to get the business through the process. Critics point to these filings as evidence that Trump is a "failed businessman," a crook, a liar, and someone to be disdained.

Now don't get me wrong: I don't in any way support Donald Trump for President, but I must speak out against these particular attacks, because I think they are dangerous, especially in the current economic climate. Availing oneself of the protections offered by the Bankruptcy Code should never, in and of itself, be looked at as a negative character trait.

In the interest of full disclosure, as I stated at the beginning of this blog, I am a bankruptcy attorney. Almost all of my clients have availed themselves of the protections offered by the Bankruptcy Code. From a professional perspective, I am clearly biased in favor of those who choose to use the Bankruptcy Code to relieve themselves of some of their debts. But this bias only partially forms my opinion.

At the outset, it is vital that we recognize that the personal debt of our founding generation was one of the major driving factors that led us toward independence from England. The powerful landowners in America owed substantial debts to financiers and suppliers in England, and one of the benefits they obtained through independence was friendly courts to decide on their disputes with these creditors. In fact, the existence of these friendly state courts was one of the major points of contention among the Virginia ratifying convention, when the new Constitution proposed to create a unified system of federal courts with original jurisdiction over disputes between citizens of the United States and citizens of foreign states.

Even with the Constitution's expansion of federal power in 1789, though, our founding generation still recognized the important role that bankruptcy plays in the economy. To that purpose, enacting uniform laws respecting bankruptcies was one of the enumerated powers provided to Congress in Article I, Section 8 of the Constitution. From time to time for more than a hundred years, Congress would enact temporary bankruptcy laws during periods of significant economic distress, giving debtors a method by which they could release some of the pressure brought on by overweening debt.

In 1898, Congress enacted the first permanent bankruptcy law, which authorized any person to come before a federal court and seek a declaration of bankruptcy, which would relieve them of their obligation to pay their debts in exchange for turning over the bulk of their assets to a trustee for the benefit of their creditors. That law remained in force until 1979, when it was superseded by the current Bankruptcy Code, which remains in effect with only a few modifications to this day.

Our nation has a longstanding tradition of allowing our citizens to renege on their debt obligations in order to give them a "fresh start." This tool is important because it relieves people of the obligations of debts they cannot afford and lets them get back out into the world to be productive members of society again. The idea is that when a person is overburdened with debt, basically the entire fruits of their labor goes over to their creditors, which reduces the debtor's incentive to work hard, innovate, and improve their position.

The argument comes from the same general principle that drives the conservative push against the welfare state: if people do not have an incentive to work, they won't be productive, and they will be a drain on society. The difference between the arguments, though, is in the direction the disincentive is pushing from. Fundamentally, it boils down to whether one is optimistic or pessimistic about human nature and individual industry.

Opponents of a welfare state argue that because workers don't need to work hard in order to survive, they won't have an incentive to work hard, and they won't innovate or improve their lot. Essentially, because people are basically lazy, they will sit back and relax on their minimum standard of living without trying to improve themselves. A more optimistic view of this situation would argue that because they don't have to stress about whether or not they will be able to obtain food and shelter, they will be more likely to take risks and push the envelope. Innovation and individual industry will thrive.

Supporters of a bankruptcy system argue that because workers won't get to keep any of their additional earnings for themselves if they improve their lot, instead having to allocate all their additional earnings to payment on their debt, they won't have an incentive to work hard, and they won't innovate or improve their lot. This represents the optimistic view regarding human nature - people generally want to be innovative and industrious, but when everything they work for is taken from them, they become beaten down and dejected. A more pessimistic view of the situation would say that the debtors shouldn't have got themselves into a situation where they owed more than they could afford in the first place, and they are clearly lavish in their spending and irresponsible, so why should their irresponsibility be rewarded with debt relief?

Personally, I prefer to be optimistic about human nature. I know that people are generally good, generally honest, generally hardworking, and generally empathetic. Some people are none of these things, and some people are some and not others, but if you go through life assuming that people you meet will be good, honest, hardworking, and empathetic until they give you a reason to believe otherwise, you will more often than not be correct. That's why people who avail themselves of the protections of the Bankruptcy Code should not be viewed with scorn. It's for the same reason that people who receive Section 8 housing assistance or SNAP benefits should not be viewed with scorn.

People in all these situations are generally just trying to get by, and almost without exception the creditors who get "screwed" by the bankruptcy filing went into the deal with their eyes open, knowing it was a possibility. They built that possibility into the interest rate they charged. Even if a debtor goes into bankruptcy for opportunistic purposes, I don't believe that person should be vilified. It's a waste of our time and energy, and distracts us from more important reasons not to vote for Donald Trump, like his proposals for immigration reform, or his rampant misogyny, or the fact that, like Michael Bloomberg, he's really a Democrat.

At the end of the day, Donald Trump would be a terrible choice for President, but I don't think the fact that four of his businesses have filed for bankruptcy has anything to do with that fact.

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