Bankruptcy: Fresh Start Policy

One of the cases heard in Bankruptcy Court today involved a twenty something who graduated from college 3 or 4 years ago. After graduation he got a job with the State of Florida which pays him an annual salary of around $40k per year. He apparently thinks he makes $80k as he lives in a $2,000 per month appartment, drives a brand new BMW and has $35,000 in an unsecured loan. He has fallen behind on his car payments and on the loan. With few real assets and unable to pay his debts he has filed a petition to have his debts discharged in bankruptcy. The Bankruptcy Court will have to decide whether he is deserving of a "Fresh Start." In doing so, the Court will be taking into account the following considerations:

Why Give the Debtor a Fresh Start?
One goal of the Bankruptcy Code's long-term debtor rehabilitation is to give the debtor a "fresh start." Assuming the debtor has complied with the Code’s requirements and has surrendered executable assets or sufficient future income for distribution to creditors, the debtor is entitled to a new beginning, unburdened by the unpaid balance of prebanktuptcy debts. The fresh start is intended not only to serve the interests of the debtor but also the public good. A rehabilitated individual debtor may become self-sufiicient once again, rather than a public charge. The rehabilitation of a corporate or business debtor may preserve jobs and add to the general well-being of the economy.

Cons of the Fresh Start Policy
In determining who may receive a bankruptcy discharge, bankrupcty courts have to balance the above considerations against the harm individual debtor may fail to learn from the bankruptcy and may simply slide again into debt, or, where a business is failing, attempting to save it may ultimately be less economically advantageous than selling its assets to a more effective user. Furthermore, the debtor’s fresh start comes at the expense of its creditors, who are forced to forgive a portion of the debt to which they would otherwise have been entitled. In addition to the direct effect that this has on the creditors themselves, the discharge of debt adds to the cost of giving credit and, therefore, affects the market as a whole. That is, borrowers in general are likely to pay more for their credit because lenders factor into their interest rates the predicted percentage of loans that will be uncollectible because of bankruptcies.

So What Decision Will the Court Make?
It is a longstanding policy of bankruptcy law that relief is intended to help the honest debtor who has encountered serious financial difficulty. Bankruptcy is not supposed to enable prodigals to evade payment of their debts. This does not mean that a prodigal should never be placed in bankruptcy. Sometimes the bankruptcy of a dishonest or manipulative debtor serves the best interests of creditors. It does mean, however, that when bankruptcy has the effect of allowing a dishonest debtor to take advantage of creditors, it should be denied to the debtor. To draw the line between a deserving and undeserving debtor requires a moral judgment which is not always self-evident or easy to make. Nevertheless, many provisions in the Code require the court to take into account the debtor’s good faith or sincerity in determining the availability and form of relief. Sometimes an undeserving debtor may be denied relief altogether, and sometimes limits may be imposed on the advantages to be obtained by the debtor. In the end, the Code generally favors rehabilitation over liquidation, on the theory that creditors are usually likely to do better under a plan of payment. The Bankruptcy Court will likely grant a discharge.

For more bankruptcy information read: Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation,
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