A debtor’s morality

After I posted a comment on Ken’s recent post about swimmer Nick D’Arcy and his decision to file a debtor’s petition in bankruptcy, he graciously invited me to contribute a post if I am insistent on disagreeing with his take.

Ken argues that there is something that doesn’t seem quite fair about Nick D’Arcy’s “strategic” decision to voluntarily declare himself bankrupt and so avoid paying the court order for compensation (and costs) made in favour of Simon Cowley in relation to injuries that Cowley suffered when D’Arcy assaulted him in 2008.  He suggests that perhaps the liberal forgiveness of debts which occurs under Australian law should be amended somewhat where the bankruptcy is commenced voluntarily to avoid this sort of peverse incentive to file for bankruptcy.

I disagree.  But I find it more interesting the way that this narrative suggests that D’Arcy has acted in an immoral way.  Just what is our morality of debt?

Nick D’Arcy is clearly an unpopular young man.  Most of the coverage of his decision to file for bankruptcy and the consideration of the AOC as to whether this should disqualify him from the Olympic team has allowed considerable room for comment from people who consider that bankruptcy allows him to avoid this debt, most notably Cowley’s lawyer.  See for example here, here and here.  Avoidance in this context has a particular moral weight.

High profile cases don’t necessarily make good law.  The fact that D’Arcy is a medical student from a wealthy family doesn’t help the way that the whole thing looks.  And I am constantly surprised by just how many people there are who are willing to dishonestly exploit the letter of the law to their own financial advantage.

However, as I said in the comments of Ken’s post, there are plenty of cases where so-called ‘strategic bankruptcy’ is in fact an entirely reasonable and sympathetic situation.  While bankruptcy has lost some of its stigma over time, the vast majority will avoid it if they can.  In my experience in practice doing a lot of insolvency work, I can think of only one client I advised who acted like the decision to become bankrupt was an easy one.

Even more tellingly, the main thing that differentiates voluntary bankruptcy from involuntary bankruptcy in this discussion is the feeling that the debtor is ‘getting away with it’.  That sentiment is an undeniably penal and retributive idea that a debtor should literally pay, even if they can’t afford it.  Accompanying that thought is that because he may be wealthy in the future or because his family is wealthy, then they should take on the moral obligation to pay this debt, even though they have no legal obligation to do so.

Bankruptcy law attaches no moral distinctions in processing of debts.  In most cases, the law conforms to the principle of pari passu, the idea that creditors shall share in the recovered assets of a bankrupt equally in proportion to their debt.  It also makes almost no distinctions as to which debts shall be released on bankruptcy.  The old provisions which privileged tax debts in some ways have now largely been removed.

Nonetheless, most people have a sense of morality about debts which are “more payable” than others.  Acting for particular creditors, I have many times experienced debtors who continue to pay a particular debt after their legal obligation to do so has been removed.  Sometimes this is for commercial reasons – the supplier needs to be maintained, so their old debt is still honoured.  However, sometimes this is purely for moral reasons.  Primarily this happens with debts owed to family members, friends, or people who we feel “deserve” to be paid.  I have seen it with people who continue to pay schools, trusted tradespeople or health professionals or other people that we can put a face to.  In contrast, though I often have clients who assert that paying their debts is a moral issue, I have never seen anyone continue voluntarily to pay a bank, finance company or the taxation office as a moral issue.  I doubt that anyone would have the same questions about D’Arcy’s escape from his obligations if he were escaping a debt owed to a bank after a failed business venture.

Expanding personal credit (particularly credit cards) has chased bankruptcy into the middle class.  Business related financial failure is largely destigmatised.  However, there is still a considerable stigma attached to personal financial failure for a lot of people.  And for all that people say that people are free and clear after discharge, this is simply not true for most people.  A credit rating trashed by bankruptcy is a lasting and significant hurdle for most people trying to get back on their feet.

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11 Responses to A debtor’s morality

  1. meika says:

    What is galling is that actions where someone hurt someone’s physical face are dealt with and the perp then swaps the debt for the some loss of social face through bankruptcy (not equivalent) (If a psychopath they won’t even notice that.) It’s galling because we’ve kindly dropped the eye for an eye style of justice but through a serious of economic liberal legal hoops, it’s all *poof*. (Indeed, to a psychopath there will be no difference between one type of debt and another, they would never repay a debt after bankruptcy because they felt they ‘should’.)

    I hear psychopaths make good surgeons.

    It’s galling because the notion of balance upset. We’re animals and if we can’t balance we can’t walk. All we are left with is the ability to cuss, and we’re cussing much.

  2. Ken Parish says:

    Actually the main reason I contacted Danielle when I saw her comment was that she was a valued Troppo author years ago, and I’d like to enhance the diversity of qualityTroppo contributors wherever possible. I’ve been the only lawyer amongst a gaggle of eminent economists for quite some time (not that there’s anything wrong with economists …). Even broader perspectives would be welcome.

  3. Danielle McCredden says:

    Thanks Ken, you are a true gentleman of the interwebs.

    Meike, in this case, D’Arcy has served the ‘justice’ issue – he has been prosecuted and sentenced and served his penalty for the crime. But there is still the feeling that he hasn’t “paid” sufficiently for his actions.

  4. I used to work for ITSA (the insolvency regulator), and I agree that declaring bankruptcy isn’t trivial.

    As well as the credit rating impact, it means that:
    (a) your house (including one shared with your spouse) and other assets get sold except for a vehicle with equity of less than $7500 and a couple of other exceptions, and you can’t acquire new assets (again with a few exceptions)
    (b) you can’t travel overseas
    (c) you have to make income contributions towards your bankrupt estate if your income exceeds a threshold (around $50,000/year depending on number of dependents)

    This applies for a minimum of 3 years, so it’s not like D’Arcy can go bankrupt now and then rake in millions from endorsements after London.

    For some time there has been a substantial trend to enter Debt Agreements (essentially a binding agreement to pay a certain percentage of debts to creditors over time) instead of declaring bankruptcy. The big advantage of a Debt Agreement is that you retain more control over your situation and have far fewer of the restrictions of bankruptcy imposed.

    This would indicate that there is a significant disincentive to go bankrupt if you have any financial means.

    In fact, many bankruptcies are lodged by those with very few or no assets, and no prospect of ever earning enough money to repay their debts even if they were kept “on the hook”. For these people, bankruptcy is often literally a “lifesaving option”.

  5. FDB says:

    “But there is still the feeling that he hasn’t “paid” sufficiently for his actions.”

    That’s not just a “feeling”. It’s what our courts have determined, according to our laws.

    There is also both the “feeling” and the palpable reality that Cowley has not been adequately “compensated”.

    “quotation marks”

    • Danielle McCredden says:

      But this is surely true for all situations of bankruptcy – due to the forgiveness mechanism, a person ends up not paying what they actually owe. Would you feel differently if the consequence of bankruptcy were that he was released from the obligation to repay his unpaid credit card debts?

      Cowley is clearly the wronged party, but he nonetheless chose to commence and continue compensation litigation against an assetless defendant. I am absolutely positive before doing so that he was advised by his legal advisers that if he were successful, this very outcome would be likely.

  6. Tel says:

    Indeed, to a psychopath there will be no difference between one type of debt and another, they would never repay a debt after bankruptcy because they felt they ‘should’.

    Isn’t that the most fundamental property of money for every mental mindset, psychopath or otherwise? It collapses a multi-dimensional universe down to a single number and the drug dealer buys a glass of beer for the same price (and with the same dollars) as the street sweeper, or anyone else for that matter.

    That’s both the genius of money and the stupidity of it.

    I guess if Clive Palmer threatened to punch my lights out, he could pay D’Arcy’s fine every night for the rest of his life and never care. On second thoughts I could probably outrun Clive Palmer even with a bottle of scotch slowing me down. On third thoughts, it there was a quarter of a mil in it for me, I might not run as fast.

    I must admit I’d rather have my dial cleaned by Clive Palmer than Nick D’Arcy, all things considered.
    ;-)

  7. Alan says:

    I am not completely sure it is a valid argument to base legislation on the unproven and unevidenced claim that X is a psychopath.

  8. Chris Lloyd says:

    Here’s an idea. Why can the court not impose a lifetime annuity on the debtor? If D’Arcy had been ordered to pay Cowley say $2000 per month for the net 50 years, it would be much harder to decalre bankruptcy. The court impose such on divorced husbands.

  9. Russell says:

    “Accompanying that thought is that because he may be wealthy in the future or because his family is wealthy, then they should take on the moral obligation to pay this debt, even though they have no legal obligation to do so.”

    Compared to just a few decades ago we’ve largely eliminated that damage to a whole family’s reputation that could be done by one member going wrong, like becoming an unmarried mother, or being found guilty of ‘stealing as a servant’. Are we down to an un-erodable minimum – a feeling that parents may be at least a little responsible for how their children turn out? That siblings may possibly share the same weakness, say for cocaine?

    If the parents have the money, I think they should pay the son’s fine. It would signify that as a family they value their reputation as people who have the moral sense to know that what their son did was wrong, and that compensation is due to the victim. If later the culprit inherits that much less from his parents, so be it – it’s hardly a high price to pay. To let your son become a bankrupt over a debt you can easily pay (to the victim) should result in the complete loss of your reputation as a decent person.

  10. Pedro says:

    Darcy should be ordered to mow Cowley’s lawn till he repays the debt in cash or kind.

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