Bankruptcy, default and debt

9th January 2012

In the eyes of the law, a corporation is a person, but when a real person, that is, a person of flesh and blood, declares bankruptcy or defaults on his or her debt it is usually considered a moral failure — at the very least a source of embarrassment.  American Airlines’s recent declaration of bankruptcy, on the other hand, was greeted by many commentators in the press as a smart “business decision,” a way of reducing debt and regrouping for growth.

James Surowiecki pointed this out in The New Yorker, contrasting the plight of the Airline with tens of thousands of mortgage owners who are “underwater,” i.e. owing more than their property is worth.  Our conventional moral standards prevent most of us from taking advantage of the “smart” way out of such predicaments.

To be sure, there are penalties for individuals who declare bankruptcy or default on their loans, usually in the form of restrictions on the debts they can subsequently undertake with credit cards and loans.  But the greatest obstacles are fear and shame.  Surowieki notes that one study suggests that eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can.”  (See, “Living By Default.”)  And, he adds, the banking industry has been seeking to reinforce that belief:  “the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message ‘to their family and their kids and their friends.’”

In what sense, then, are corporations “persons?”  This is a question of increasing urgency as the U.S. Supreme Court has ruled that corporations, as persons, are entitled to freedom of speech and can make unlimited contributions to political campaigns.  On the other hand, can they fall in love and dream?  Can they get sick and die?

The creation of fictitious corporate persons has proven very beneficial to modern economies.  Their legal rights have been instrumental to the growth we have sustained in the modern era.  But it is a fiction, nonetheless, often a useful fiction — but sometimes not.

The mind makes sense of the complex world through the categories it creates.  A large part of thinking is finding the right categories, the ones that help us to be more productive, more successful, and more human.

Let’s try the thought experiment of shifting our categories in the other direction, towards creating more profitable, more corporate-like people rather than more people-like corporations.  Families might consider divesting themselves of obsolete members, like grandparents, or selling off underperforming assets, like children who don’t do their chores.  What about cutting back on food when times are tight as a matter of policy, or selling off surplus body parts?  We might consider routinely right-sizing our extended families, selling information on our friends, or even diversifying by selling off parts of ourselves.

How restrictive and inhibiting it can seem to be a non-corporate person.

 

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