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.