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.
Financial BAPCPA
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 of ex party applications 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.
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