Published by Mark

Fairness In Bankruptcy

January 22, 2009 at 11:09 am

The New Yorker magazine carried an article called “Mind Games: What Neuroeconomics Tells Us About Money And The Brain”. Author John Cassidy discusses behavioral finance experiments that were done to help the financial industry better understand how investors behave.

One scenario presented to different people was this:  You are sitting next to a stranger on a park bench.  Someone comes up, offering to give you $10.  The catch is that the stranger gets to decide how to divide the money. If you accept the offer, you must be willing to accept whatever part of the $10 the stranger lets you have (even if he decides to keep $10 and give you zero).

The results of the experiment were very interesting.  Most people said they’d reject the offer if they stood to benefit any less than $3 out of the $10. (Remember, they are giving up free money!) The explanation was that it wasn’t about the money.  People have a very negative emotional response to what they perceive as unfairness.

Many months ago, in my blog entitled Lying In Bankruptcy Court: The Straw That Broke The Camel’s Back, I talked very frankly about the U.S. bankruptcy system, and about the thousands upon thousands of hours I’ve spent in bankruptcy courts representing clients from all over central Indiana.  I explained that the bankruptcy system is there to provide a much-needed safety net for honest debtors, who, often due to forces beyond their control, have reached a point where they cannot take financial care of themselves and their families without help. The other side of the story is that, for the system to continue to function, the facts of each debtor’s situation have to be fairly and completely stated in order for the creditors to also be treated as fairly as possible.

John Ventura, in his book, The Bankruptcy Handbook, says that for centuries now, society has been debating the ethics of bankruptcy.  Our present system of bankruptcy law is a compromise between two perspectives.  One side says that debtors should be forced to pay their debts no matter what, and punished if they cannot.  The other perspective considers that well-intentioned people make mistakes and have bad things happen to them that they cannot control.  Over the years, the “pull and tug” between these two extremes has resulted in a middle ground – a system of bankruptcy law that tries to be as fair as possible to creditors as well as to debtors

A fellow attorney remarked to me (see I Never Thought I’d Be Here), “No one can work in this field of bankruptcy law without thinking every day, “There but for the grace of God, go I.” I couldn’t have said it any better.

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