Bankruptcies in the News: Donald Trump Says… “SMART”

Donald Trump Tweets Bankruptcy 6-19-2015

Donald Trump Tweets Bankruptcy 6-19-2015

Of all the comments made by Donald Trump since starting his run for the presidency this year, his Tweet from June on bankruptcy got it right.  While he denies filing personal bankruptcy, he still extols the law as a “smart” business tool that is employed for corporate advantage by great people.  During the first Republican Presidential Debate of 2015, he went further by brushing off the suggestion that he should have any sympathy for his creditors, or the consequences of his bankruptcy upon them.  To quote: “These lenders aren’t babies. These are total killers.  They are not the nice, sweet little people that you think, ok?”

As a financier and real estate developer himself, Trump is right on point.  In the real estate and construction field, it is common practice for developers to structure their business entities for the purpose of insulating their investments from the potential failure and bankruptcy of their other ventures.  The risk of financial failure and loss is built into the system as part of the cost of doing business.  In a broader sense, creditors and lenders are not uninformed people investing money out of the goodness of their heart for the benefit of their borrowers.  They know how to evaluate risk, run a credit analysis on borrowers, and can factor those risks into the loan terms they impose on debtors – for the goal of maximizing their own profits.  If a deal goes bad or ends in bankruptcy, then creditors should eat the loss for not having walked away from making the loan in the first place.  But it does not always work out that way, as I will expand upon shortly.

Donald Trump Speaks

Donald Trump Speaks

It is an important point to consider because it illustrates the shallowness of the argument that filing bankruptcy is somehow a moral issue.  The fact of the matter is that an individual’s choice to pay a debt, avoid a debt, or file bankruptcy is not a question of ethics as far as most formal business contracts are concerned.  Of course, on a purely individual and personal level, it might be a different matter.  There is an obvious difference between borrowing from a friend or family member as opposed to an international financial corporation.  And it is rarely possible to negotiate a fair contract when the parties themselves are inherently unequal.

By way of example, I have spoken with too many potential clients who are being hounded by creditors, but choose to allow themselves to be exploited out of a misapplied sense of ethical or moral obligation.  Consider the hypothetical illustration of an elderly woman who recently lost her husband.  She lives on a meager and fixed Social Security income of less than $1,500 per month.  She is debt free and owes no one anything other than her mortgage payment, living expenses, and medical bills.   However, she gets calls from aggressive creditors on debts owed by her deceased husband for which she has no obligation to pay.  They call at all hours of the day and night, tell her that she is obligated to pay his credit card balances, ask her if she likes being an immoral person, and threatens to sue her.  Despite her attorney’s advice, she decides to pay her deceased husband’s debts because it is “the right thing to do.”

There are many things wrong with this hypothetical.  In the state of her residence, she has no legal obligation to pay her deceased husband’s debts.  Even if she did, and was sued to collect, her income would be free from garnishment – so they could never collect anyway.  In fact, the collection agency has violated the law themselves under the Fair Debt Collection Practices Act, and should have to pay the widow damages for their own actions.  Unfortunately, this hypothetical is not far removed from reality.  And while it is not my place to question people’s motives, it is also clear to me that knuckling under to creditor exploitation seldom equates to being an act of moral courage.  To reiterate, un-equals can never negotiate under a presumption of equality.

In order to understand this dynamic, it might be helpful to step back and look at the larger forces in play.  When an individual asks for a line of credit, they are typically negotiating, in the loosest sense of the word, with the public face of what is normally an international financial corporation.  These entrenched corporations often diversify their holdings by lending to suppliers and producers, as well as merely consumers.  They produce nothing of ‘use’ or ‘exchange’ value – other than profits which are maximized off the sale of money.  When these financial corporations choose to lend, they have the ability to evaluate a debtor’s financial status, evaluate their credit worthiness, and estimate the likelihood of being repaid.  Based on these evaluations, they will assign an interest rate and dictate lending terms to the borrower in order to maximize profit in proportion to the amount of financial risk the debtor poses.  If a borrower stops paying a debt, the lender will raise their interest rate; attach fees and penalties; attempt to collect the debt themselves;may rent the debt out to collection agencies; send the file to litigation in court; place a lien on personal or real property; and/or write the debt off their books to get a tax break.  And the debtor may get a 1099-C requiring them to claim the write-off as income on their taxes.  In the realm of corporate consumer finance, it is obvious as to which party negotiates from a position of power.  Does this mean debtors should borrow as much as they can without attempting to pay their debts? No. But if someone loses the ability to settle their financial obligations, then their decision to legally avoid the obligation should not be considered a moral choice.  And those financial institutions that negotiate from a position of power should bear the cost for having gambled on the risk for the sake of profit.  As I mentioned earlier, it does not always work out this way in practice.

Consider the mortgage crisis of 2008.  Corporate lenders went on a field day making questionable loans based on overvalued properties.  They bundled these loans into inflated securities that they dumped on the market for the sake of short term profits.  When property values dropped, and the loans came due, mortgage defaults exploded.  As a result, many people were thrown into bankruptcy as they lost their homes and jobs.  It is also common knowledge that most of those financial corporations that made and backed the loans did not pay the price, but were actually bailed out of their losses by the federal government with taxpayer money.  The creditors did not eat their losses, because most of them had already left the scene with their profits and commissions.  This begs the question: What does a person’s ethics, or individual morality, have to do with corporate financial contracts for consumer debt?  Is the person who lost their job immoral for not being able to pay their mortgage?  Are they unethical because they are in a foreclosure, or filed bankruptcy?

The question answers itself.

My “Bankruptcies in the News” blog is aimed at providing articles of interest regarding famous companies, or individuals, who have sought bankruptcy protection.  It should be noted that although bankruptcy filings are public record, the docket itself is not readily available through simple internet searches. It is maintained behind a “pay-wall” requiring a registered account, and payment for searches. Therefore, if you file for bankruptcy, it is unlikely anyone will be aware of this fact ~ unless you are a famous public figure.
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