Bankruptcy- Who Benefits From It?

19 May 2015

Bankruptcy defined, as taken from Findlaw.com– “Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors.” Of course there is a lot more to it than that; they might be personal or business, there are different types within each, the disbursement of assets are different, and courts may attach additional conditions to a filing as they see fit.

The simple point I wish to make here lies in the short definition above though, the part about “getting rid of debt and repaying….”

First question- what happens once an individual, or business, gets rid of their debt? The answer- they create more debt.

Next set of  questions- did they learn anything? Were they held accountable? Were they required to undergo any sort of financial training, so it would not happen again? Did they pay back every penny of the money they owed, with interest? Were all who were owed money paid back? Likely answer to all questions- no!

The part of the definition that mentions repaying creditors really contains a lot of small print. It should read that some creditors are repaid, while others are not. It should state that many debts, or parts of debts, are “forgiven”. That is, the filer of bankruptcy is not held accountable for those debts and the person or business who extended the credit loses that money. For repayment, the government is first in line (IRS and student loans for example), large business entities come next, individuals and small businesses come very last (landlords for example). And in many cases only a token amount of money is required to be paid back.

 Who Benefits?
The most important question that needs to be asked is who benefits from a bankruptcy filing? We are led to believe that the filer benefits. Their debts are essentially forgiven and they are free to move on with their lives and, we hope, do a better job of managing their finances next time. But know this, it takes very little time for a filer to get another credit card and other types of credit once the filing is complete, in some cases almost immediately. Many of these cards and credit offers come with very high interest, which puts the filer immediately back in the position they just got out of.

Individuals and businesses lose money because of filings, but who really pays for that?  Large businesses- credit card companies for example- have it all built in to their fees, meaning you and I pay. And remember, the government gets all of their money. In the case of individuals and small businesses, they lose out.

So who benefits? The answer is corporations, and by default, our economy, or so the doctrine goes. The formerly bankrupt consumer, now “absolved of all debt” included in the filing, is back in the pool of viable targets. Bankruptcies are accomplished quickly and cheaply in many cases, especially for consumers at the bottom of the food chain, so that they can be quickly fed off of once again.

 

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