[grecy]

>a corporation would not hesitate for a second, on moral grounds, to restructure its debts through bankruptcy, and neither should individuals.

I see what you're saying, but I really dislike that way of thinking, because it's justifying something bad by saying "That's what others are doing"

That's like saying that because BP are spilling oil into the oceans and getting away with it, you shouldn't stop doing it yourself.

The world would be a better place if morals were used in more decisions, not less.

[rayiner]

You're begging the question. Spilling oil into the oceans inherently hurts people and the environment in an uncompensated way. Bankruptcy, meanwhile, is just part of the rules of the game, just as much as enforceable debt obligations are part of the rules of the game. Everyone knows, a priori that repayment obligations can be enforced by recourse to the courts, and everyone also knows, a priori, that those obligations can be discharged by those same courts (what the federal court giveth it can taketh away). Because bankruptcy is part of the rules of the game, it's priced into interest rates. When a bank loans you money, it expects you to default with some probability and charges you a premium for that risk. There is nothing immoral about forcing them to eat the consequence if the risk you compensated them for.

It's not a matter of ignoring morality. It's a matter of not ascribing a moral dimension to something that doesn't inherently have one.

In that vein, Google "efficient breach."

[jack-r-abbit]

But by your own words, this woman's bankruptcy does hurt other people... the people looking to get a loan later. They are now paying the even higher interest rate due to her bankruptcy being priced in. The more people that default, the higher the probability that the next person will default and the higher the premium the bank charges for that risk.

[rayiner]

The rates for subsequent borrowers will only go up if her bankruptcy was unexpected. That is to say, if the bank charged her interest assuming 10 of 100 loans would default, and she is one of those 10, then her bankruptcy does not change the interest rate the bank charges. On the other hand, if the default rate is higher than the bank expected, whose fault is that?

[jack-r-abbit]

They can only do so much to predict the future based on the past. When they fund loans today based on today's default rate they have no way to know what crisis hits in 3 years to cause a spike in defaulted loans. The system must correct itself with enough padding to cover the smaller fluctuations.

[tptacek]

Isn't that also known as "ruthless default"? :)