Corporate vs Personal Bankruptcy Attitudes
Blame the victim?
I ghostwrite a bankruptcy practice’s blogsite and moderate the comments. Got an interesting comment last week. The commenter wanted to be on record that bankruptcy attorneys are devil’s spawn who enable the deadbeat insolvent to saddle the piously solvent with their mistakes.
The commenter isn’t the only one with this attitude, which is why I bring it up.
When a company declares bankruptcy the angry mob doesn’t break out the pitchforks and go after the management team or board (with a nod to the quasi-exceptional case of former GM head Rick Wagoner). But the screeds about people in foreclosure and those who seek bankruptcy protection proliferate like melanoma cells.
Upside-down logic
According to the Institute for Financial Literacy, the four most common causes of financial distress include overextension on credit, unexpected expenses, reduction of income and job loss. These are essentially the same reasons corporations file for protection (income and job loss more logically rolled together in the case of businesses).
So when it’s the masters of the universe and captains of industry at the helm of corporations making short-sighted decisions that drive their companies into financial distress, why are we so hard on the employees and small business owners whose personal misfortunes are tied to corporate failure?
Welfare Queens?
Those of us alive during the 1980′s remember the famous stories/urban legends of the woman paying for groceries with food stamps, then carrying them out to her new Cadillac. In other words, gaming the system and thumbing her nose at the rest of us.
Is there a bit of that same belief about individuals who go bankrupt? That they use bankruptcy as a personal money management strategy like Donald Trump uses it as a business strategy? Hrumph, even The Donald gets his own TV show and multi-level marketing network of millions. What gives with our idol worship of this guy and our disgust for the little guys?
I’d really like to know what’s behind the difference in attitude here. Please weigh in.
It is all about observability. A corporation makes most of its important decisions behind closed doors in places far away. Yet, all we observe is the annual report with its beautiful cover and optimistic message.
We then give corporate executives a free-pass on failure and then blame the economy. This is because we feel we could not have done any better under the observable circumstances.
Most, however, are not willing to give the “little guy” a break. It is much easier to question every risk taken or decision made, without understanding the real reason he may have been forced into bankruptcy. His life is just more transparent and open to second-guessing.
I think the difference lies in the fact that most of us can relate to a personal bankruptcy and cannot relate to the corporate version. The personal bankruptcy shows up as the run down house down the street causing your property values to go down, or the car being repossessed, where the corporate bankruptcy results in a reorganization and a small article in the paper the average Joe isn’t reading anyway. Joe sees his drinking buddy getting away with absolution of his debts while he struggles to pay his and is resentful. Joe has never run a business of his own and doesn’t have a real understanding of the corporate bankruptcy or it’s ramifications. If he did, he’d give his neighbor a break and would be on the corporate campus with his torch and pitchfork.
I wish I could answer this question. Here is my best guess. The reality is that there is a lot of mythology in business bankruptcy. Most people really don’t understand what is going on, and it seems quite above them. That way, when it is used like a tool by the likes of Donald Trump, most people just shrug their shoulders, and strive to be that sophisticated.
In contrast, everyone can relate to someone filing personal bankruptcy. Even people who make a good living often live hand to mouth at some point, and feel the financial cliff which is always lurking. When someone choose to use bankruptcy to get out of a bad financial situation, they are demonized for not making good financial decisions. This “envy” is based on a belief that our society has limited resources. If someone “else” files bankrutpcy, it is affecting what “I” have. In reality, the opposite is true, in that bankruptcy allows a crippled financial participant to get “back in the game.”
To a lesser extent this is what is going on in the health care debate. There is a belief that if everyone has access to health care, people with health care will someone loose what we have.
An efficient capitalist system does not require “losers” who are desolate, without food, clothing, health care, etc. Quite the opposite, the healthier our population is, the more prepared we are as a society to compete globally. Personal bankruptcy is a necessary and important tool to assure that all members of our society can participate.
What aiki14 said. Plus this: I have been a creditor when a business went under (a publisher) owing me something. The experience left me profoundly disgusted with the way the bankruptcy system operates. The people who owned the LLC apparently committed fraud, spending royalties they didn’t pay out (as they should have), all the while feeding authors a line about where their money was. And the lawyers involved only made things worse. I pray I am never again a creditor in a bankruptcy. Maybe if more average Joes lost something when a business went under, they wouldn’t be so quick to fault individuals but not corporations.
We should take care not to conflate foreclosure with bankruptcy. It is perfectly natural, and perhaps even justified, for homeowners to feel animosity toward the former owners of foreclosed properties because those properties almost invariably reduce the value of all of the other homes in that neighborhood. In contrast, a single personal bankruptcy, in most cases, affects only the Debtor and his or her creditors. Of course, lending rates and credit availability are affected by personal bankruptcy rates in the aggregate. But no one bankruptcy has the adverse collateral consequences of a foreclosure.