The moral burden of bankruptcy

Consumers daunted by mountains of debt face another uphill climb as they sort through mixed messages on the moral implications of filing for bankruptcy.

On one side, Christian conservatives who applauded last year's tightening of bankruptcy laws are now appealing to higher authority to tweak the consciences of would-be defaulters. On the other side, voices irked by double-digit interest rates and questionable marketing tactics of credit-card issuers say debtors are often morally justified in seeking relief.

The morality debate is heating up amid signs of trouble for people living on the margins:

•Even though tougher filing laws took effect Oct. 17, the number of monthly bankruptcy filings grew by more than 300 percent between November and March, from 13,758 to 49,977, according to a June report from the Administrative Office of the US Courts.

•Foreclosures on home mortgages were up 38 percent nationally in the first quarter of 2006, according to property tracker RealtyTrac Inc.

•The average American household owes more than $9,300 on credit cards, up from $2,966 in 1990, according to Cardweb.com.

Against this backdrop, advocates for and against the use of bankruptcy disagree about where to lay the blame when someone gets buried in debt.

Christian personal finance guru Mary Hunt has a stern message for anyone considering bankruptcy: "It's absolutely legal, but it is not moral."

"I would say, 'You accepted these credit cards. You had the obligation to know what you were getting into,' " says Ms. Hunt, author of "Living Your Life for Half the Price." " 'You spent the money, and sure you had a big medical bill, but it probably would not have put you over the edge had you not already been deeply in debt.' "

To make this case, bankruptcy's critics often cite Psalm 37:21: "The wicked borrow and do not repay, but the righteous give generously." From sources such as Crown Financial Ministries and Dave Ramsey's nationally syndicated radio show, advice seekers hear they have a duty in most cases to keep their payback promises even when life throws them a curve ball.

But another school of thought sees a more complex picture in which lenders also face admonitions to forgive debts. For instance, Jonathan Alper, a bankruptcy attorney in Orlando, Fla., reminds distraught clients that the American legal tradition of allowing for bankruptcy stems from Deuteronomy 15:1-11, which calls for debt forgiveness every seven years. Others agree with Mr. Alper that those who are able should repay, but those unable to do so should not feel guilty.

In Psalm 37, "the psalmist is talking about [cases where] borrowing money and not repaying it becomes a business strategy," says Gary Moore, a Christian investment adviser in Sarasota, Fla. By contrast, he says, single women should not worry about declaring bankruptcy, for instance, after using credit cards to feed their children.

"Those people ought to go to bed every night knowing that God has granted them debt relief," Moore says. "And they're not, because they hear this garbage [from antidebt Christians]. That's what Jesus called placing heavy burdens on his flock."

"May," a Virginian who requested anonymity to protect her reputation, knows the moral struggle well.

For 14 years, she paid the minimum balance due until she maxed out her credit card on routine purchases such as shoes, clothes, haircuts, gifts, and equipment for her dog-grooming business. Charges initially worth $5,000 resulted in a balance of $10,000, even after she increased her payments to $150 per month. Every day, she hid the mail before her husband could see her predicament, and she remembers wishing "I could go to sleep and not wake up." Yet she kept paying back her debts at close to 20 percent interest.

"I did think, 'I signed up for the credit card. I used it. I have a moral obligation to pay this,' " May says. "If I didn't feel some moral obligation, I would have told these debt collectors to take a hike." But after a creditor told her she was incurring debt faster than she could pay it down, she spoke to a lawyer, divulged her secret to her husband, and sought protection under Chapter 7.

"I must have paid [creditors] way over $20,000 for a $5,000 debt," May says. "Knowing in my heart that I paid everybody that I owed the original amount plus a reasonable amount of interest, I don't feel any guilt about having filed bankruptcy. I wish I had done it a lot sooner."

In Hunt's view, what matters in resolving the moral quandary is whether the borrower lived up to his or her original promise. But Alper begs to differ because, he says, the circumstances surrounding the original loan are sometimes suspect to a degree that they nullify a borrower's moral duty to repay.

"The people [whom creditors] often solicit are high-risk customers" with considerable vulnerabilities, Alper says. "By contract, they owe the money. But what's the validity of offering a lollipop to a diabetic? Or offering a cigarette to someone who's addicted to nicotine? You're not on an equal footing," and therefore the contract isn't moral in the first place, in his view.

Others might bear some blame as well, according to David Jones, president of the 177-member Association of Independent Consumer Credit Counseling Agencies. He sees bankruptcy as morally justified in situations stemming from uncontrollable events, such as a job loss or medical emergency. But he also blames teachers and school administrators for failing to make credit education a part of most curricula.

"Society has failed many people because [it] hasn't provided the kind of education and help and background that they need," Mr. Jones says. "I suppose you could say [some profligate spenders] are somewhat off the hook, but I'm a little bit concerned about that because there is a responsibility to be a good financial steward."

In Hunt's view, individuals benefit far more in the long run from belt-tightening disciplines, such as those she employed to pay nonmortgage debts in excess of $100,000, than they do by filing for bankruptcy.

"There's a good feeling we get when we're paying back debt," Hunt says. "Bankruptcy is the opposite of that."

But if restoring good credit is the goal, Jones has some bad news for Hunt's theory of thrifty virtue. Creditors like to see a recent history of bankruptcy, he says, because it usually means an applicant has poor spending habits, has no debts, and is ineligible for bankruptcy for another five to seven years. In short, this applicant stands to be a near-term cash cow for the creditor.

May's experience suggests he might be right. She received three credit-card offers – including one from a previous creditor – during one week in June.

"Somebody that has a lot of debt and is paying their debt and straining every month to do so is not nearly as good a credit risk as someone who has just walked out of bankruptcy," Jones says.

"I would hate to invite people into bankruptcy with that scenario, but that happens to be the fact," he concludes.