Moral Aspect of Bankruptcy

From the Catholic Encyclopedia

Bankruptcy must be considered not only from the legal but also from the moral point of view; for sound morality prescribes that debts must be paid. But a man who becomes bankrupt proclaims his inability to pay his debts in full as they become due. Such an acknowledgement does not now entail the penalty of slavery or of imprisonment as of old; the law takes possesion of his property and divides it among his creditors. If it suffices after all to pay his creditors in full, there is an end of the matter, justice and conscience are satisfied. If, however, as is usually the case, the creditors only receive a portion of what is due to them, they have suffered loss through the action of the bankrupt, and if he is the voluntary cause of that loss, he is morally to blame as the cause of injustice to his neigbour. There is no moral blame attributable to a man who through misfortune and by no fault of his own has become bankrupt and unable to pay his debts. But if bankruptcy has been brought about by the debtor's own fault, he must be condemned in the court of morals, even if he escape without punishment in the court of law. Bankruptcy may be the result of one's own fault in a great variety of ways. Living beyond one's means, negligence or imprudence in the conduct of business, spending in betting and gambling money which is due to creditors are frequent causes of debtors appearing in the bankruptcy court. All such causes are accompanied with more or less of moral quilt, in proportion to the bankrupt's advertence to their probable consequences, and the voluntariness of his action.

Breaches of the moral law are also committed in a great variety of ways in connection with the bankruptcy itself. The benefit of the law is extended to the bankrupt debtor if he faithfully complies with all its just requirements. To do this then is a matter of conscience. He is bound to make a full disclosure of all his property, and to surrender it all for the benefit of his creditors. He may indeed retain what the law allows him to retain, but nothing else, unless the law makes no provision at all for him, and the result of surrendering everything would be to reduce himself and those dependent on him to destitution. Such a result, however, must not be readily presumed in the case of modern bankruptcy law which is humane in its treatment of the unfortunate debtor and makes what provision is necessary for him. It is obvious that it is against the rights of creditors and against justice for an insolvent debtor to transfer some of his property to his wife or to a friend, who will keep if for him till the storm blows over, so that the creditors cannot get at it. In the same way a debtor is quilty of dishonesty and fraud if he hide or remove some of his property, or if he allows a fictitious debt to be proved against the estate.

Loss is caused the creditors and injustice is committed by an insolvent debtor who continues to trade after the time when he fully recognizes that he is insolvent, and that there is no reasonable hope of recovering himself. He may continue to pay what debts he can as they become due if payment is demanded by his creditors, and he may make current payments for value received. But if in contemplation of bankruptcy he pays some creditor in full with a view of giving that creditor preference over the others, he becomes quilty of a fraudulent preference. Bankruptcy law indeed prescribes that certain privileged debts should be paid in full, but it lays down that the rest must be paid rateably among the creditors without favour to any. If a bankrupt through favour pays a creditor in full, while the others have in consequence to be satisfied with less than their just share, he is quilty of fraud. This is not only the case if such payment is made after the petition in bankruptcy has been presented, but also if it is done within a certain period, fixed by law, before the presentation of a petition. In Great Britain this period is three months, in the United States it is four months previous to the adjudication. Laws forbidding such preferential payments are just, and they should be observed. If they have been violated, and such fact becomes known, the payments may be removed by the trustee in bankruptcy or the official receiver. However, although fraudulent preferences are contrary to positive law, it is not clear that they are against natural justice so as to impose on the quilty parties an obligation in conscience apart from any order of the court to make restitution. The question is disputed among theologians, and some maintain that no obligation to make such restitution can be imposed, apart from a positive order of the court, inasmuch as after all the preferred creditor has only got what belonged to him.

If the conduct of the bankrupt with reference to his bankruptcy has been such as the law requires, the court grants him a discharge; otherwise he will be subject to certain disabilities as an undischarged bankrupt. Some special debts and obligations are not affected by the discharge, and the question arises whether an absolute discharge extinguishes the debt, or merely releases the bankrupt from legal liability. The effect of such a judicial act depends on the law of the country. If that law expressly provides that a bankrupt who has obtained his discharge is not thereby freed from his former obligations, but merely protected against legal proceedings of debt, there is an end of the question. On the other hand, it cannot be denied that the law of a country may release an honest and unfortunate debtor from his load of indebtedness, and make him free to start business afresh. In commercial societies especially such an enactment might conduce to the public good, since it is not granted to fraudulent debtors but only to such as are honest and fulfil the rigorous requirements of the law. It is merely a question of fact as to what is the effect of the law of any particular country. Lawyers and theologians are agreed that in most countries the effect of a discharge is merely to bar legal proceedings for debt against the bankrupt. His moral obligation to pay all his debts in full when he is able to still remains; he may put off payment till such time as he can conveniently fulfil his obligations, and in the meanwhile he is guaranteed freedom from molestation. This seems to be the effect of the National Bankruptcy Law of the United States. "Since the discharge is personal to the bankrupt, he may waive it, and since it does not destroy the debt but merely releases him from liability, that is, removes the legal obligation to pay the debt, leaving the moral obligation unaffected, such moral obligation is a sufficient consideration to support a new promise" (Brandenburg, The Law of Bankruptcy, 391).

On the contrary, an absolute discharge, when granted to the honest bankrupt according to English law, frees the bankrupt from his debts, with certain exceptions, and makes him a clear man again. This is admitted by English lawyers and by theologians who treat of the effect of the English law of bankruptcy. When, therefore, an honest bankrupt has obtained his absolute discharge in an English court, he is under no strict obligation, legal or moral, to pay his past debt in full, though if he choose to do so, his scupulous rectitude will be much appreciated. What has been said about bankruptcy applies also to compositions or schemes of arrangement with one's creditors when they have received the sanction of the court.

LUGO, De Justitia et Jure (Paris, 1869), disp. XX; LEHMKUHL, Theologia Moralis (Freiburg, 1898), I, nn, 1026, 1035; CORLLY, De Justitia et Jure (Dublin, 1870-77), III, n, 1232; Am Eccl. Review (Philadelphia) XXXI, 348.

T. SLATER