Can a big Ethical mistake lead to a firm’s bankruptcy?
Bankruptcy is designed to give the debtor another chance after a financial failure, and it is often an option that is both more ethical and more efficient than liquidation. it address some basic issues, such as whether Chapter 11 bankruptcy itself is ethical and what elements help one to decide if a particular bankruptcy is ethical. There are many chances for unethical acts during bankruptcy, such as the ethics of a firm that files for Chapter 11 bankruptcy yet has sufficient assets to meet its financial obligations, or the often exorbitant fees that bankruptcy professionals are allowed as well as the apparent partiality demonstrated in some bankruptcy courts.
I had studied many relevant journals, articles regarding the topic. Based on my study I founded, not only the ethical mistakes leaded to a firm’s (company) bankrupt. We cannot say it all. But it is also one of the reason lead to a firm’s bankrupted. But more over than that.
During my study I founded Legal ethics also play an important role every day in the bankruptcy realm. The entire system is founded on ethical behavior. At the onset of a bankruptcy case, the debtor has an ethical duty to fully disclose his financial holdings and his financial dealings. The bankruptcy system relies on debtors who tell the truth and lay out all to see. Only after full disclosure can a debtor get relief that the bankruptcy law provides. In addition to debtor ethical behavior, the bankruptcy system relies almost entirely on attorney ethics. In every case one would expect that an attorney has looked into the statements and assertions contained in every schedule and document filed to ascertain whether or not the truth is asserted. Unfortunately, the truth is a hard creature to grab hold of these days. The need for bankruptcy relief somehow outweighs legal ethics in far too many circumstances. In looking for the truth, the trustees in bankruptcy cases are charged in part with verifying the truth of the debtor’s statements. In verifying the statements, trustees often look for some type of evidence that values are correct and that the law has been complied with. Though many times, correct values are given, the amount of false values and non-disclosures are completely unacceptable. Ethics seem to be going by the way side and repercussions for unethical behavior are almost non-existent. Since bankruptcy has always been based on ethical behavior, it is even more so under BAPCPA. (The Bankruptcy Abuse Prevention and Consumer Protection Act, is a law that reformed the personal bankruptcy process in the U.S., passed in 2005. Under BAPCPA, filing for Chapter 7 personal bankruptcy became more difficult as more stringent guidelines and eligibility requirements were defined.) The ethical hazards are tremendous for a debtor and his/her attorney to not independently verify information. Rule 9011 of the bankruptcy code speaks to representations made by signing and filing documents.
Ethical behavior in bankruptcy
The court every day with excuses as to why they should not be bound by the ethics the rest of us obeys to; and they get away with it.
Money drives the bankruptcy system. Without money, attorneys would not file cases and the system would fade. Money, however, should never be allowed to replace ethics. Without ethical behavior bankruptcy becomes a free-for-all. Motions get set without basis asking for relief that makes no sense. Attorneys argue for continuances for debtors that quite frankly should never have filed a case in the first place. Debtors get thrown into a system where they have no chance of surviving. Many times it’s just not ethical. Money should not drive the bankruptcy system, ethics should. Doing the right thing and paying back what you borrowed to the best of your abilities is the basic theme of Chapter 13. Unfortunately, many times the game has taken place of the sense of right.
Ethical people are out there. Ethical attorneys are prevalent. These ethical persons are usually the ones you don’t see standing before a court making up excuses and whining for time to “find” the truth. These are the people who have checked the information before filing the case, checked the facts before presenting the motions, made payments to their creditors to the best of their ability and the people who deep down just want to do the right thing. These are the people who are the foundation of the bankruptcy system. As to the others? Every day they are filing the eighth and ninth serial case for debtors who have no chance of complying with the BAPCPA document requirements with information that is usually false and completely unverified for the sole purpose of a stay or to get a fee. These people need to reflect on their own ethical behavior.
So far, case filings are down since the enactment of BAPCPA, but what other effect has this new law had on cases? Through May of 2006, I have seen from my study, a dramatic effect on the monthly amount that debtors are required to remit in order to fulfill their plan obligations. Why does this matter? The more the debtors pay in on their cases, the more that peoples (we) disburse on their behalf. The more people disburse, the fewer fees we need to take to run the office. There are two different trends that I showed my studied from the cases filed in 2006. First, more of the cases are being filed with mortgage payments in the plan; this is up to over 20% of the cases are administering. In 2005 only 15% of the cases had mortgage payments in the plan. I have no idea if BAPCPA has any effect on this number or if this is just the continued increase that offices was experiencing with mortgages in the plan. In 2002 just over 9% of the cases had mortgages, and that number gradually increased to just over 15% by 2005. Not only have the number of plans with mortgages increased, but also the average monthly mortgage payment per plan with a mortgage has increased by over 7% of what that same average was in 2005. The second trend I see from my study in cases filed in 2006 is that the average monthly payment required by the debtor, excluding the mortgage amount, has increased by over 20% of what that payment was in 2005. Through May, 2006, we have only started to administer less than 10% of the cases than we did in all of 2005, but so far payments with mortgage amounts outside the plan are over 20% larger than they were a year ago. I have to believe this is a direct effect of BAPCPA and a very welcome trend, since case filings are down substantially from where they were a year ago.
From my studies I founded, there are a number of ethical issues facing lawyers today in bankruptcy and insolvency litigation. One of the main issues is the level of disclosure in ex party applications, such as those for a stay of proceedings in order to file a proposal under the BIA or a plan under the CCAA. The courts have held that counsel must make full and frank disclosure of all material facts and circumstances that may be relevant to the court’s decision, as the court does not have the benefit of opposing counsel to ensure that all facts are brought to their attention. Above 30 Counsel must note that this includes facts that may be harmful to the applicant’s case. While the client may request that counsel present only the facts that assist in the application, counsel has a duty to the court to put forward all relevant information, particularly in the cases ofapplications where the bankrupt’s counsel is the only counsel present.
Many of us will face a Financial Crisis at some point in our lives. Catastrophic events such as family illness, the death of the primary employee, the unexpected loss of a job, or a natural disaster like Hurricane Katrina can alter one’s financial solvency in the blink of an eye. In such circumstances one’s very livelihood, once secure, is drastically upended and life becomes a daily struggle to pay bills, evade haranguing phone calls from creditors and protect the family home from foreclosure.Financial worries take an enormous physical and emotional toll on individuals and relationships alike. Sleep is just one more lost luxury. Self-blame is common and often leads to clinical depression. Friends and peers may become critical and judgmental of one’s choices. Long-time business partnerships and marriages will sometimes falter under the constant pressure to survive financial hardship.
When presented with a financially draining situation beyond one’s control, investigating bankruptcy is not only understandable, but may in fact offer the best hope of debt relief. In these cases, filing bankruptcy serves a morally correct and ideal purpose: to protect otherwise fiscally sound individuals experiencing untoward hardship from monetary ruin by providing a clean financial slate with which to begin life afresh.
Consider now the opposite side of this same coin: those individuals experiencing financial hardship resulting from events within their control. These circumstances might include reckless overspending, recreational gambling, racking up additional debt after filing for bankruptcy, mishandling finances (or financial illiteracy), or simply choosing to renege on payments to creditors. At what point should ethics factor into their bankruptcy claims?
Rarely if ever, according to many economists, who point out that lenders and creditors anticipate and negotiate the risk of consumer non-payment into their loan or interest rates, thus protecting themselves should a borrower default. Because of this industry practice, borrowers shouldn’t feel morally irresponsible when they stop paying on a mortgage or credit card debt. Does a ‘no harm, no foul’ approach to bankruptcy render the question of ethics moot?
Not so, says David VanHoose, Herman W. Lay Professor of Private Enterprise at Baylor and a professor of Economics. He supports the view that an individual entering into a contractual agreement has a moral duty to honour their obligation to the second party.
“A borrower has an ethical duty to avoid behaviours that significantly increase the probability of non-repayment of an obligation to a lender,” says Dr. VanHoose. “In an important sense, a borrower is steward of the funds that the lender has made available for the borrower’s use.”
Professor Steve Green, chair and director of the graduate program in economics at Baylor, agrees with his colleague from a moral standpoint, but admits that it’s a complicated issue when viewed from an economic perspective.
“Is it a binding promise to pay when the terms of the loan – the interest rate you pay – factors in the #possibility of default? That is, if the rate you are paying in effect includes a bankruptcy insurance premium?” asks Dr. Green. “Given the widespread use of the bankruptcy provision and the easy access of creditors to borrower information, one could argue that virtually all transactions in our economy are priced this way.”
That said, he concludes, “Bankruptcy imposes costs – mainly the increased difficulty of getting loans in the future, so it should be avoided for practical as well as moral reasons.”
In his book, The Ethics of Bankruptcy, Jukka Kilpi remembers a time in America when items were purchased on a cash-only basis or not at all, and the use of credit was considered to be a disreputable practice by the American majority. Achieving the ‘American Dream,’ he writes, once meant owning a home and an automobile.
What a different picture Americans paint today in this age of easy credit and instant gratification!
According to MSNBC, more than 600,000 claims were filed in America’s federal bankruptcy courts in 2006. This figure actually marked a 70 percent decline from the previous year’s (2005) claims of 2.1 million, when proposed changes to the nation’s bankruptcy laws sparked a run on the courts by individuals rushing to file before the reformed law went into effect that October. That drop was just temporary according to industry experts, who indicate that the number of bankruptcy filings is on the rise once more.
In April, CNNMoney.com reported that February 2007 saw a 17 percent increase in bankruptcy claims over the year previous month. High gas prices, the recent fallout of the mortgage industry and rising use of credit by consumers are creating an economic condition ripe for bankruptcy. This is great news for bankruptcy lawyers, but what about consumers suffering under the stigma of bankruptcy? Some would tell us that stigma no longer exists.
Timothy Gorman, publisher of Debt-Relief-Solutions.com, believes that the stigma associated with bankruptcy lessens exponentially as the number of claims increases. In an article posted on Bnet.com entitled Bankruptcy as an Option, Gorman states that “bankruptcy has become so common, it is no longer ‘the big ugly monster’ it once was.” He further writes:
“Filing for bankruptcy once scarred you for 10 years. There was no hope of buying houses or cars or getting more credit cards. Often filing for bankruptcy meant you had to give up most of your property. Anymore there are credit card offers in the mail as soon as your bankruptcy is discharged. Buying a car is no problem as long as you can handle the sky-high interest rates. And buying a house, well, you may have to be a little more patient and let your bankruptcy ‘settle’ in the stomachs of mortgage lenders before they will grant you a home loan, but you can certainly get one, bankruptcy or not.”
What are the ethical variables to be considered here? Was it morally right that bankruptcy was once considered a disgrace in the American culture, as Kilpi asserts? Is it morally right that claiming bankruptcy results in little more today than a slap on the consumer’s wrist, as Gorman would have us believe? Should our courts process bankruptcies without assumption of guilt or blame? The answers are as varied as each individual’s ethical compass.
Consider this question: if lenient bankruptcy laws lead to higher levels of consumer credit, isn’t that an economic boost to society? Ideally, yes. Until we begin to abuse those laws.
Enter the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which seeks to prevent consumers from abusing the bankruptcy system by clearing all their debts when they have the ability to repay at least some of them.
The reforms appear to be working. An increasing number of individuals file for bankruptcy under Chapter 13 of the bankruptcy code, in which individuals establish a payment plan with creditors involving a period of seven to 10 years. Before the new bankruptcy law took effect, the majority of Americans filed for Chapter 7 bankruptcy, where all unsecured debts were eliminated.
So who benefits most from bankruptcy – society, creditors, or claimants?
Obviously debt collectors are benefiting under the reformed law, since they are more likely to receive some money from the borrower, no matter how reduced that payment may be. Creditors do not appear to be suffering, if offers of “easy credit” and “flexible financing” to those with shaky credit histories are any indication. Predatory lenders who aggressively market credit cards to college students and extend high-interest loans to individuals against a pending pay check or car title appear to be thriving. Since federal law now requires bankruptcy claimants to enrol in debt counselling before they file, ads touting various debt consolidating and counselling services are flooding television, billboards and the print media. While some of these companies are reputable, many are not, so consumers are wise to do their research.
Another plus on the side of bankruptcy (and capitalism): bankruptcy laws protect entrepreneurs when they take risks and fail, allowing them a fresh start on a new idea.
Certainly the immediate benefit filing for bankruptcy offers the claimant is the cessation of hostile calls from collection agencies demanding payment on credit card debt, or creditors threatening to repossess a car. Court-ordered reduced payments on secured debts, such as taxes, a mortgage, or a student loan, also provide tremendous relief. Unsecured debts, such as medical bills, could be discharged completely by the court and may be well worth the price of waiting out a shaky credit rating for up to 10 years.
Even so, bankruptcy remains the last option many financially distressed consumers will choose, and personal ethics may well be the reason. While some individuals see little or no stigma attached to bankruptcy and are unwilling to scale down either their lifestyle or their spending to pay off a debt, others will struggle financially for a lifetime before reneging on an obligation.
Just as ethics are central to giving individuals the right to wipe a financial page clean and enjoy a new start at life, so too should ethics factor into one’s acting responsibly so as to avoid bankruptcy court in the future. With the promise of luxury only a quick swipe away, that is not always going to be the case.