Why do we allow bankruptcy...
Bankruptcy is extremely important for a healthy economy. I know it sounds counter-intuitive. I mean why let people get out of paying their debts?
This certainly was the mindset in the past. In ancient Greece a man that couldn’t pay back his debts was forced into slavery until the debt was repaid but not just him his wife and children also.
This creates a feudal system like we had in the middle and dark ages of Europe where basically everyone was a debt serf to their landlord (hence the name land LORD).
Here’s the problem with that:
Say you have a great idea like a horseless carriage but you’re not rich and need investment (for example loans) to get your idea off the ground. How likely would you be to take that risk if not just you but your family could be jailed if that idea didn’t work out?
How many great inventions and ideas would’ve never come to fruition because the entrepreneur was too afraid of being jailed or enslaved?
Ray Kroc took out a second mortgage on his house to get McDonalds off the ground
Henry Ford took a $430,000 loan (in today’s dollars) to start Ford
In order to an economy to grow you must have people i.e. entrepreneurs who are willing to take a risk because if that risk pays off it means more jobs for everyone and more tax revenue for the government.
This is why even now with all the talk of ‘bankruptcy reform’ entrepreneurs who became insolvent due to business debts still get a fast track to a discharge
Are there some unscrupulous people that try to abuse the system?
Sure but the benefit that bankruptcy provides FAR exceeds the cost of the relatively few people that try to cheat.