Ralph Brubaker et Heidi M.

Hurd,

« Maximizing Wealth by Forgiving Debts »,

Revue d’études benthamiennes [En ligne], 15 | 2019, mis en ligne le 15 juillet 2019, consulté le 27 mars
2022. URL : http://journals.openedition.org/etudes-benthamiennes/4885

Introduction

1The “fresh start” afforded to individual debtors through the discharge doctrines of bankruptcy law has
been notoriously resistant to justification by a single normative principle. While those who work at the
junction of law and economics have insisted that welfare economics is up to the task of explaining why
bankruptcy law rightly undoes obligations enforced by other areas of law, this article casts doubt on the
defensibility of any effort to explain how maximizing wealth is best advanced by forgiving debts. As we
argue, while utilitarian vindications of the doctrines of personal debt relief have been profoundly
influential, they commit proponents to a set of normative claims which, when made manifest, make
many squirm. And they struggle to explain many of the doctrinal requirements and exceptions that are at
the core of the bankruptcy discharge—for example, the inalienability of the right to discharge, the
requirement of a voluntary petition before debt relief is granted, the complete forgiveness of debt instead
of a mere moratorium on collection, and numerous exceptions to the right of discharge that reflect a
preoccupation with the culpability with which debtors have incurred, managed, or manipulated their
obligations. As such, it is our view that those who seek both to understand the doctrinal detail of the
bankruptcy discharge and to morally motivate its results ought to turn to other schools of thought for
insight and inspiration.

2In Part I, we shall outline the components of a utilitarian theory of bankruptcy discharge and outline
four examples of such a theory that have been prominent in the literature. In Part II, we shall elucidate a
set of normative complaints about any effort to ground personal debt relief in a theory of what will
maximize social welfare. And in Part III, we shall demonstrate why utilitarian theories are at pains to
explain core aspects of American bankruptcy discharge doctrines—that is, why there is a poor “fit”
between the doctrines that have long defined the conditions of personal debt relief and the utilitarian
agenda to craft laws that will maximize wealth, and thereby welfare, summed across all.

3Let us begin by canvassing briefly some of the most influential claims made on behalf of the
bankruptcy discharge by those who write within the powerful philosophical tradition of utilitarianism. Put
succinctly, a utilitarian considers an action, practice, or institution justified if, but only if, it maximizes the
good when summed across all members of the community. There are three significant and quite
controversial commitments embedded within this simply-stated moral view: first, that whatever the good
is, it is to be maximized; second, that there is a singular good, which was historically construed by
Jeremy Bentham as pleasure1 and by John Stuart Mill as happiness,2 but that is now commonly
defined by modern welfare economists as preference satisfaction;3 and third, that the relative
distribution of the good is irrelevant, because what is of moral concern is its aggregate maximization. To
those who believe that one is categorically obligated not to offend against what is good, even in the
name of that good, or not to sacrifice an individual’s rights, even if so doing will minimize aggregate
rights violations (e.g., that one is not permitted to kill, steal, or lie, even if so doing will reduce the overall
number of killings, thefts, or lies), the maximizing principle will be the source of their dispute with
utilitarians. To those who think that what is good is not the satisfaction of personal preferences, but
rather, say, the achievement of human flourishing, virtue, welfare (objectively, rather than subjectively,
defined), or the fulfillment of duties correlative with others’ rights, then the utilitarian’s view of the good
will be the locus of their complaints. For those concerned with the equal distribution of goods across all
members of society (or a fair distribution on some other non-egalitarian criterion), and who are offended
by the hoarding of that good by a single glutton who personally derives more satisfaction from its use
than would all other members of society cumulatively, the distributional indifference principle will provide
their motivation for rejecting utilitarianism.

4While there are grounds to question the defensibility of the precepts to which utilitarianism is
committed, it is hard to deny that many decisions are rightly made on the basis of what will maximize
preference satisfaction or welfare summed across all concerned, even if that is not the sole criterion by
which all decisions are rightly made. In our view, deontological rights, duties, and permissions work to
police the legitimate boundaries of utilitarian decision-making. Within those boundaries, the proper
measure of the morality of a choice, institution, or practice is the degree to which it maximizes the good
summed across all affected—whether that is defined as pleasure, happiness, preference satisfaction, or
some more objective conception of welfare. After all, when rights and duties are not in play, why would it
not be the case that the right thing to do is whatever will maximize good consequences? Surely that is
the basis upon which many decisions are properly made within families, democratic legislatures,
regulatory agencies, businesses, and organizations.

5It is perhaps unsurprising, then, that utilitarian accounts of the bankruptcy discharge are both plentiful
and popular. Just as utilitarians within the field of criminal law have sought to justify the institution of
punishment by pointing to an array of social benefits that it is said to serve (specific deterrence, general
deterrence, moral education, the reduction of vigilantism, the cathartic expression of social outrage,
etc.), so utilitarian theorists have sought to vindicate the bankruptcy discharge by pointing to the multiple
social benefits it is thought to secure. Consider four often-cited arguments of this sort.

6The first of these arguments focuses on the role that personal debt forgiveness plays in spurring
systemic economic growth of a sort that is wealth, and thus welfare, maximizing for all. Margaret
Howard, for example, has argued that the personal bankruptcy discharge should be made to serve “only
one goal—to restore the debtor to economic productivity and viable participation in the open credit
economy.”4 This would not be a utilitarian goal if it were sought for the benefit of the debtor and at a
potentially greater expense to creditors or other participants within an open credit economy. Howard,
however, does not seek the economic rehabilitation of debtors for their own sake (as does the
rehabilitationist, whose views provide an alternative theoretical framework). Rather, she seeks it for the
sake of the larger society’s collective welfare. As she makes clear, “[t]he educational and psychological
portions of the rehabilitative goal of bankruptcy play no part under the functional economic approach”
that she proffers.5 To Howard, the goal of personal discharge law must be to improve debtors’ future
economic functioning so as to minimize the economic impact of debt on society as a whole—“that is the
appropriate concern of those who structure the bankruptcy system.”6 The constraints placed on the
bankruptcy discharge should thus be designed to “prevent skewing of economic decisions, including
decisions both to lend and to borrow, by the intrusion of factors irrelevant to economic decisions.”7
Thus, concerns about the (blame)worthiness of the debtor—the culpability with which she incurred debt,
the maneuvering in which she engaged prior to declaring bankruptcy, the forthrightness with which she
disclosed assets during the bankruptcy proceedings—are wholly irrelevant, unless they reveal that non-
economic considerations have intruded to warp economically optimal decisionmaking.

7Thomas Jackson’s classic piece on bankruptcy’s fresh start doctrine also articulates this first version of
the utilitarian defense of bankruptcy discharge.8 He reasons that “[r]equiring debts to be paid out of
future income may lead an indebted individual to devote more of his energies and resources to leisure,
a consumption item that his creditors cannot reach. By doing less work and enjoying more leisure, the
individual undoubtedly decreases his productive contributions to society.”9 The claim, then, is that
discharge will restore incentives to engage in wealth-maximizing pursuits, the benefits of which will
cumulatively outweigh the costs imposed on creditors (and those to whom they pass those costs) and
the costs of administering a debt-forgiveness system.

8Both Howard and Jackson adopt an ex post (after default) perspective that emphasizes the role of debt
discharge for individuals as a spur to entrepreneurial activity and the importance of entrepreneurship to
systemic economic growth. A similar utilitarian concern with creating appropriate incentives for
productive utility-maximizing economic activity by debtors adopts an ex ante (debt incurrence)
perspective, instead. For example, Douglas Cumming posits that “[a] more forgiving bankruptcy law …
that includes the possibility of a fresh start may unambiguously be expected to be associated with a
greater overall level of entrepreneurship—both by increasing entry at the margin and by increasing re-
entry at the margin.”10 This line of reasoning parallels utilitarian justifications for the limited liability
feature of corporate entities and, indeed, theorists have often explicitly analogized the bankruptcy
discharge to “a form of limited liability for individuals.”11 Of course, while a large share of individual
bankrupts’ debts are indeed attributable to business obligations,12 the bulk of their debt is a product of
personal consumption, not business activity. Consumer spending, though, is also widely believed to be
important to economic growth in the United States,13 and so an assurance of later bankruptcy relief in
the event that consumer debt proves economically debilitating might be an important spur to such
spending. Therefore, a utilitarian all-things-considered accounting for the aggregate costs and benefits
of the availability of debt discharge through bankruptcy relief would also consider the marginal impact on
consumer spending (both ex ante and ex post) and any resulting systemic economic growth that the
institution generates.14

9A second account of personal bankruptcy that draws on utilitarian concerns for maximizing social utility
(wealth or welfare) posits that the goal of bankruptcy is to place losses on the cheapest cost-avoiders or
least-cost insurers of those losses. The general argument is that wealth and welfare are maximized
across society when economic losses are born by those who can best prevent them and most cheaply
insure against them. Within this school of thought, multiple theorists have disputed whether debtors or
creditors constitute the cheapest cost-avoiders and least-cost insurers (and such a theory makes
conceptual room for those who might argue that third parties are better situated than either creditors or
debtors to bear the cost of default). In Ted Eisenberg’s view, debtors are more likely than creditors to be
able to know, control, and insure against the causes of financial distress, and hence, a theory that seeks
to minimize the costs of default will militate “against a broadly available discharge.”15 As numerous
critics have argued, though, professional creditors have large stores of actuarial information that enable
them to accurately gauge the percentage of their loans that will result in default, as well as accurately
and efficiently price the premium necessary to spread this risk of default across a large portfolio of
loans.16 Moreover, creditors possess both control over whether a loan is made and the ability to
manipulate the incidence of default through varied credit standards.17 It is not at all obvious, therefore,
that debtors are generally better insurers against, or preventers of, credit defaults than are their
creditors, which counsels in favor of generally placing credit default losses on creditors through a
bankruptcy discharge under this utilitarian account.18

10A third account of the bankruptcy discharge that presupposes a utilitarian agenda emphasizes the
efficiencies that accrue to creditors who would otherwise be compelled to employ private contracts to
protect their interests. Inasmuch as lenders are unable to control the behavior of borrowers after loans
are made, and inasmuch as nothing prohibits debtors from favoring one unsecured creditor over another
when they are unable to meet all of their debts, bankruptcy serves “to establish the priority among the
conflicting claims of creditors.”19 Moreover, were creditors left to their own collection remedies, they
would be repeatedly forced to litigate questions related to the extent and location of debtors’ assets, the
existence of priority liens, and the legitimacy of debtors’ conduct with regard to their estates. When a
centralized system of debt relief is coupled with an equitable distribution of assets, creditors are likely to
find that they can “avoid situations in which, because of imperfect information, they incur significant
litigation costs only to find that their judgments are of little value.”20

11A fourth strand of argument within the utilitarian literature on personal bankruptcy is preoccupied with
the degree to which the increased costs of credit that are the likely result of imposing the default risk on
creditors serve as the equivalent of “insurance premiums” paid by all users of credit as a way of insuring
their relief from debt in the event of financial ruin.21 Indeed, this insurance paradigm is likely the
dominant utilitarian justification for bankruptcy relief for individual debtors.22 “Viewed in this way, the
‘bankruptcy premium’ is no more an undesirable deadweight economic loss than is insurance
generally.”23 The effect of bankruptcy’s imposition of default costs on creditors is to convert losses that
would be crushing to some into losses that are insignificant to many. One might worry that such an
agenda resonates far better with a distributive justice theory than with a utilitarian theory, since its
principal concern appears to be with the distribution of losses, rather than their net minimization. But if
(plausibly enough) increases in wealth yield diminishing marginal utility, and vice versa, then there is
reason to think that utility is created (and not just redistributed) by spreading losses to many that would
be ruinous if borne only by a few.

12These four accounts are but chestnut examples of a rich contemporary literature that grounds the
normative commitments of personal bankruptcy in a concern for what will maximize wealth and,
ultimately, welfare summed across society. We do not propose to extract further examples from this
extensive and quite sophisticated literature, nor do we propose to engage internally with these examples
in any detailed way, for we take the ability to construct a plausible utilitarian explanation of the modern
institution of personal bankruptcy to be well-proven. Our task here has simply been to capture a few
prominent examples for purposes of our more general discussion. The more general discussion that
holds our interest concerns the normative and descriptive tensions that are, or ought to be, a source of
discomfort to those who are convinced that the cumulative plausibility of the extensive literature in the
utilitarian tradition has won the day in personal bankruptcy theory. For while utilitarians may have taken
the field, there is no question but that their normative commitments and descriptive lapses expose them
to challenges which, if not insurmountable, are at least sufficiently formidable that they cannot be
ignored without willful academic blindness.

Normative Complaints with Utilitarian Theories of Bankruptcy Discharge

13Let us start with the normative challenges to any utilitarian theory of debt relief. The first is a member
of a family of arguments that are made against utilitarian theories of various areas of law generally, for it
shares the complaint that utilitarian theories are blind to the individual moral merits of those whose fates
they affect. In criminal law, utilitarians are confronted with the claim that their theory commits them to
the possibility that the innocent should be punished and the guilty should be acquitted when and if so
doing will maximize the welfare of the larger community. In tort law, utilitarians are confronted with the
supposed reductio ad absurdum that their theory logically entails imposing liability for traffic accidents
on ballet dancers in the (however unlikely) event that ballet dancers can more cheaply prevent traffic
accidents than anyone else, including drivers, pedestrians, and automobile manufacturers. In property
law, utilitarians are accused of being committed to a theory that would reallocate the products of
people’s private investment, labor, and ingenuity to others who (while perhaps otherwise of lazy or
vicious disposition) could put their creations to higher and better utility. And so it is in bankruptcy law
that utilitarians must confront the charge that they are prepared to reallocate the burden of debts without
regard to the moral merits of the debtors or those asked to bear their debts, except to the extent that
those moral considerations are heuristics to identifying incentives for debtors, creditors, and others to
take wealth/welfare-optimizing actions in the future.

14This general complaint metamorphosizes into two separate but parallel sources of normative irritation
to those who are not utilitarians. First, it implies that those who may have been culpable in incurring
debts should be allowed nonetheless to escape them by transferring them away to others. Second, and
quite distinctly, it implies that some may be forced to subsidize the activities of others (by being forced to
shoulder others’ debts, after the fact)—an implication which is particularly morally galling when those
debts reflect culpable choices either to incur debt or to mismanage its repayment. Let us take up each of
these complaints in turn.

15Notice that the first complaint could be put even more starkly: bankruptcy discharge permits and
forgives promise-breaking. If one is convinced that promise-breaking, in and of itself, is a significant
moral wrong (a position that one of us has explicitly disputed,24 but which many embrace25), one
should be (at least prima facie) offended by the bankruptcy discharge simply because it represents a
willingness to absolve people of promises made and broken, full stop. But if one does not cleave to this
view (a view that becomes famously fanatical in Kantian hands26), one might plausibly still find the
utilitarian defense of personal bankruptcy morally offensive, because it is indifferent not just to the fact
that a promise of repayment has been broken, but also to the fact that the promise may have been
culpably made to begin with. After all, a debt canceled by bankruptcy discharge may have been made
by one who either negligently or recklessly risked his later inability to repay the debt, or worse, by one
who knew that he would not repay it or intended never to do so. Under a utilitarian theory, the fact that a
debt is for culpable wrongdoing—say, by being a tort liability judgment for theft or battery—is not
meaningful per se in granting or withholding discharge of that debt. Indeed, to the extent that a theory of
bankruptcy discharge is not indifferent to such matters (save on evidentiary grounds), it is imperfectly
utilitarian!

16A theory that takes societal welfare to be the good to which all other goods are instrumental, and that
embraces a maximizing principle that commends to all the net maximization of that good, cannot be
independently concerned with “the ‘cunning tricks, dealings, concealments, and frauds’ of debtors and
the unseemly grasping of creditors.”27 Utilitarians may conclude that financial irresponsibility and
dishonesty cause losses of utility, and they may therefore concern themselves with the relative
culpability with which debts were incurred as an instrumental means of deterring such losses. But there
can be no utilitarian objection, in the end, to transferring the debts of those who culpably incurred them
to others who can more easily bear them once such considerations have been accorded their due
weight in an all-things-considered utility calculation. Inasmuch as many believe that transferring away
responsibility for culpably-caused losses is itself morally unthinkable, a utilitarian account of personal
bankruptcy will fail to explain the availability of a discharge on grounds that cohere with the core moral
convictions of many.

17A second, related but distinct, normative complaint with the utilitarian account of the bankruptcy
discharge is that it not only licenses the “financial acquittal” of the guilty but also the “financial
punishment” of the innocent. In the interests of maximizing utility when summed across all, a utilitarian
theory must be prepared to require some to subsidize the activities of others—to shoulder debts that
others incurred but cannot pay as a means of releasing them from a kind of indentured servitude that
represents a greater drain on social utility than does bankruptcy’s system of cost-spreading. Those who
have the view (often attributed to libertarians but held far more broadly) that we are neither morally
entitled to externalize the costs of our activities to others nor morally obligated to bear the costs of
others’ activities in turn, must find the utilitarian’s willingness to socialize credit losses morally
objectionable.

18This, of course, is when the behavior and expectations of creditors is thought to be germane by those
seeking to defend a utilitarian account of bankruptcy against charges of unfairness. For it is commonly
argued that in transferring the burden of obligations from debtors to creditors, the bankruptcy discharge
does nothing that is morally akin to punishing the innocent. This is because either (1) creditors were
themselves culpable in extending credit to those who were culpable in accepting it, or (2) creditors
anticipated default and priced their credit to include the discounted value of the costs of debt-
forgiveness so as to have compensated themselves already for all such breaches.

19Consider the first argument that lenders are causally and morally complicit in the creation of debts
and thus deserve to be burdened by them when debtors default. While it is tempting to think there can
be little moral objection to the utilitarian goal of casting the proverbial pox on both houses as a means of
reducing its net effect, this effort to square considerations of fairness with considerations of utility-
maximization is not free of moral difficulty. To begin with, there is nothing philosophically easy about
making good on the claim that enabling (or even encouraging) wrongdoing is itself (equally) wrongful.
This task is reminiscent of the challenge in tort law of sorting out whether those who assume the risk of
others’ negligence are themselves necessarily contributorily negligent (so as to be undeserving of
compensation when the risk materializes). Some are convinced that assuming the risk of wrongdoing
(and, even more so, positively enabling it) is necessarily also an act of wrongdoing as a conceptual
matter, for wrongdoing (either in torts or in the creation of debts) is, at least in part, a function of being
able to anticipate that one will unjustifiably harm another. To say that a defendant in torts or a debtor in
bankruptcy acted wrongfully in causing an accident or incurring a debt, we have to be able to say that
she at least should have known that her actions would lead to loss, even if she was not consciously
aware of imposing a risk of loss and did not believe or intend that such a loss would occur. And so, the
argument is that anyone (any plaintiff or any creditor) who induces or enables someone to do something
that will foreseeably result in unjustified loss (an accident or the defaulting on a debt) is herself
necessarily complicit in the creation of that unjustified loss, for, ex hypothesi, if the loss was foreseeable
to her, she was necessarily culpable in creating the circumstances for it to occur or in otherwise failing
to prevent it.

20Of course, this argument presupposes that the costs and benefits of activities (or, in more neutral
philosophical terms, peoples’ reasons for action) are transparent to all, and of identical content and
weight for all. If it is possible to occupy a vantage point from which it is non-culpable to fail to foresee
that another will do something that is, from that other person’s vantage point, foreseeably harmful, then
there is no conceptual necessity to the claim that enabling another’s wrongdoing is itself wrongful.
Sometimes it is (when that wrongdoing can be foreseen by the enabler), and sometimes it is not (when
it cannot be foreseen). Thus, so long as culpability is a function of the beliefs and intentions of
reasonable persons bounded by their unique epistemic circumstances, it is fully possible for tort
plaintiffs to have non-negligently assumed risks negligently imposed by defendants, and it ought to be
fully possible for creditors to have non-culpably extended credit to debtors who culpably assumed it. So
the utilitarian cannot slip out of the knot tied for him by the theorist concerned with transferring losses
from culpable debtors to innocent creditors by declaring all creditors to be equally culpable causers of
the debts in question. Utilitarians have to admit that a utilitarian theory of bankruptcy discharge may
strap creditors who had no reason to anticipate default on the part of their debtors with debts culpably
accumulated by those to whom they reasonably extended credit.

21Moreover, the question of whether it is culpable to enable another to incur a debt upon which he or
she will likely default may be disanalogous to the question of whether it is negligent to assume a risk
that is negligently imposed by another. If these are disanalogous questions, then it may be that even if a
creditor knows that a debtor is negligently incurring a debt, the creditor cannot be thought to be culpable
in enabling that indebtedness. Now, how could it ever be non-blameworthy to enable another to do what
is known to be blameworthy? Several answers suggest themselves. The first draws on a particular (and
pervasive) concept of proximate causation. While the creditor’s extension of credit is a necessary
condition of the debtor’s indebtedness (what we would think of in criminal or tort law as a but-for
condition or cause-in-fact of that indebtedness), the debtor’s execution of an agreement to repay the
debt, however foolish or foolhardy, constitutes an “intervening cause” that renders prior necessary
conditions of indebtedness non-proximate to the subsequent act of default. On this argument, then, the
creditor who could have (and should have) predicted with reasonable confidence that the debtor would
default is nevertheless not causally responsible for that eventuality. If—and this is a further theoretical
“if”—one can be blamed only for those things one proximately causes, then creditors may not be
blameworthy for knowingly, recklessly, or negligently enabling a debtor to incur blameworthy debt.

22To those versed in theories of proximate causation and their realization in various areas of law, it will
come to mind that, as a general matter, negligent and even reckless actions are rarely thought to be
intervening causes that “break causal chains” extending back to previous actors. As such, it might be
argued that while borrowers who know or intend that they would default are intervening causes whose
decisions free creditors from responsibility for the debts they enabled, the vast majority of defaulting
debtors are merely negligent in assuming debts that they ultimately cannot pay, and as such, their
choices are insufficiently autonomous to release creditors from responsibility for those debts on
proximate causation grounds. If this is the right analysis, and creditors are rightly thought both to
proximately cause the debts incurred by defaulting debtors and to do so culpably, then the utilitarian can
continue to insist that there is no tension between utility and fairness when debts are transferred from
debtors to creditors, because creditors are equally causally and morally responsible for the financial
peril of those who could be predicted to mismanage the credit they received.

23Yet, there is a category of instances in which we do treat negligent and reckless decisions as
intervening causes—indeed, this category may include decisions that are wholly blameless, given the
liberties we think people have to determine the courses of their own lives—and the question that arises
is whether indebtedness (of either or both the blameworthy or blameless sort) is within this special
class. The paradigmatic cases within this class involve instances in which persons principally risk harms
to themselves, rather than harms to others—in tort law, for example, cases in which a person plays
Russian Roulette by holding the gun to her own head, or engages in drag racing, or climbs an 8,000-
meter peak, or embarks upon an effort to break a world record in a fantastically dangerous way, or
ingests a substance that was not made for human consumption, or otherwise risks principally herself,
rather than others. Even when such choices are neither intentional nor knowing with regard to the harm
that predictably happens, we typically think of such choices as intervening causes that release prior
(otherwise culpable) actors from responsibility for the harms that result.

24So the question is this: when a borrower takes out a loan that she fully intends to repay but has
manifest reason to think she will not be able to repay, is she foolhardy in the same way as someone
who leases a raft from an adventure company in order to white-water raft rapids that obviously vastly
exceed her skill level (risking harm principally to herself), or is she foolhardy in the same way as
someone who speeds through city streets and is thus unable to successfully stop at a red light with
faulty brakes that were negligently serviced a week before (risking as much harm, if not more, to others
than to herself)? If the former, then she can be said to be an intervening cause whose choice to use
credit severs the causal chain extending back to the creditor’s decision to extend credit; if the latter, then
the claim that savvy lenders are to blame for the debts of their borrowers remains robust.

25We do not propose to resolve the question of whether indebtedness constitutes one of those life
choices that people ought to be allowed to make, but only at their own peril. But the utilitarian who wants
to insist that no unfairness threatens efforts to maximize utility, by forcing sophisticated creditors to
absorb the debts of insolvent debtors, is unavoidably put to this task. Utilitarians might inventively refuse
this task by insisting that responsibility attaches not just to what we proximately cause, but also to what
we can prevent. Indeed, inasmuch as utilitarians seek the maximization of social utility/welfare summed
across all, they appear to be conceptually committed to rejecting the claim that there is a moral
difference between affirmatively causing harm and omitting to prevent it. Thus, utilitarian theory would
seem to embrace the thesis that if others can act in our best interests better than we can, they are
morally obligated to do so whenever the gains of so doing exceed the costs to them and to us.28 If
utilitarians can sustain this bold philosophical position, then they have good grounds upon which to
maintain that creditors can often be thought to be responsible for the over-indebtedness of those to
whom they extend credit (even if their debtors are intervening causes on a direct-cause theory of
proximate causation).

26In our modern economy in which American Express is the paradigmatic consumer creditor, there is
good reason to believe that creditors very often know that they are extending credit to people who ought
not accept it, and of course, they could indeed prevent consumer over-indebtedness simply by refusing
to provide what ought not to be accepted. But there are two things that must be said about any claim
that creditors are not unfairly burdened with defaulted debt when they are equally culpable for its
accumulation because they should have prevented its initial incurrence. First, it invites objections similar
to those levied against the paternalist who seeks the good of others for their own sakes (rather than for
the sake of the larger society, which is the locus of the utilitarian’s concern).29 Whether proffered for
utilitarian or paternalistic ends, the argument suggests that others have obligations to rescue us from
our own unwise (and even culpable) choices whenever they have cost-effective opportunities to do so. It
thus depends on a claim that one of us has disputed in some detail elsewhere—namely, that it is wrong
to do what it would otherwise be right to do, if in so doing one creates an opportunity or fails to forestall
an opportunity for another’s wrongdoing.30 Put differently, it implies that liberty is a function of the
extent of others’ wrongdoing; individuals and businesses must curtail what they do when so doing can
be predicted to curtail others’ bad acts. The more bad acts others are likely to do, the more liberty is to
be sacrificed in the name of preventive efforts. What products can be marketed is a function of the
stupidity that can be accorded foreseeable users; what services can be provided is a function of the
worst, rather than the best, means that can be made of them; what activities can be pursued is a
function of the opportunities others might take to twist them to ill advantage. Those who find such results
morally counter-intuitive can escape them only if they forfeit the claim that what we can prevent goes on
our “moral ledger” in the same way as what we cause. And in forfeiting such a claim, one is returned to
the thesis that if lenders do not culpably and proximately cause the over-indebtedness of their
borrowers, then they cannot be thought to be equally responsible for it; and they thus cannot be fairly
strapped with its consequences, even if it would be utility-maximizing to force them to absorb debts that
are crippling to those who incurred them.

27The second thing to be said of the proffered thesis that people (and collectivities) are as responsible
for what they could prevent as for what they cause is that we simply do not believe, and certainly do not
live in accordance with, that claim. There are at any time numerous things that individuals and
organizations could do to better the lives of others in ways that would be more beneficial than it would
be costly—from writing checks to humanitarian organizations, to volunteering time to aid local social
services, to promoting health, education and the rule of law around the globe. That both individuals and
organizations generally live their lives in the service of their own goals and the goals of those who are
“near and dear,” rather than in the service of strangers and organizations at geographical, temporal and
ideological remove, belies the thesis that we are as responsible for the harms we could prevent as for
the harms we cause. And it has been a famous reductio ad absurdum for utilitarianism that it demands
otherwise—that it demands too much of each of us by asking us to be, as it is famously put, indifferent
to the uniqueness of persons and thereby requiring each of us to set aside our own projects when so
doing will be less burdensome to us than are the cumulative benefits we can deliver to others. To the
extent that defending a creditor complicity thesis depends upon embracing anything as bold as the
general claim that individuals and collectivities are blameworthy for the missteps and misdeeds of others
whenever they could have prevented them cost-efficiently, it will invite a whole literature’s worth of
dispute and a whole world’s worth of daily counter-examples.

28Now consider the second major line of argument that utilitarians can invoke to explain why burdening
lenders with borrowers’ unpaid debts is not unfair and is, thus, free of moral complaint when it
simultaneously achieves a net gain in social utility. On this second argument, inasmuch as creditors
have sound actuarial information by which to predict the percentage of loans that will result in default,
they both assume the risk of default when they extend credit, and they have priced their credit so as to
recoup predicted losses in the aggregate. There is, on this account, no unfairness to creditors in
saddling them with the unpaid bills of their overburdened debtors, for they are neither unfairly surprised
nor uncompensated for such losses.

29The trouble is that while these claims may be true (and they are certainly plausible in this credit-
dependent market in which consumer credit, in particular, is a thriving business), they do not answer the
fundamental fairness concern of critics—which is that creditors will recoup their bankruptcy discharge
losses by passing them on to other borrowers through increased credit prices.31 Most economists
assume that “[b]ecause [consumer] lending markets are highly competitive . . . debtors are likely to bear
most if not all of the cost of bankruptcy protection in the form of higher interest rates or reduced access
to credit.”32 And, indeed, the spreading of bankruptcy discharge losses may go beyond borrowers and
potential borrowers by increasing the prices of products and services for cash purchasers.33 So while
business creditors have what appears to be primary control over the debts that are owed to them, they
are not the “moral owners” of those debt losses (due to bankruptcy discharge) that they do not bear: we
are. Thus, even if it is possible to argue that many who voluntarily extend credit are not unjustly
“financially punished” by having to bear the costs of debts discharged in bankruptcy, this will not resolve
the concerns about fairness if those costs are in fact transferred to the rest of us through price increases
in which we played no conscious role and for which we can hardly be blamed.

30Now if everyone defaulted on their debts in proportion to the incremental amount they paid to spread
their default costs to others, there could be no claim of unfairness, for then the benefits to each would
match the investments of each, and none could complain about others’ non-reciprocal externalization of
default costs. But, of course, it is not the case that all debtors default in proportion to the increased
prices they have paid for credit, products, and services, so effectively, those who pay their bills
subsidize those who do not.34 And knowing this, some would surely prefer to self-insure against
unpredictable losses, rather than participate in a collective scheme in which they can plausibly predict
that they will bear costs disproportionate to anticipated benefits.
31The power of utilitarianism is that it advances a powerful reason to countenance non-consensual
wealth transfers from those who have to those who have not—namely, that such transfers maximize
welfare summed across all (albeit, perhaps, at the expense of a few or even many more than are
benefitted). Utilitarianism does not, however, vindicate such wealth transfers by harmonizing
considerations of fairness and utility; rather, it does so by elevating the latter over the former. Since the
burden of the argument we have been considering was to square the value of utility maximization with
the value of fairness, we must conclude that the argument fails. Utilitarians may be correct to prioritize
social welfare over individual fairness (although we would never, in fact, concede this), but they must
prioritize among these values precisely because they cannot make them compatible within the arena of
personal bankruptcy. Hence, this leaves us with the question of whether other theories might offer more
persuasive normative accounts of the bankruptcy discharge that do not imply that the good of many (or
even a few) can come at the expense of some (or perhaps of many).

Descriptive Complaints with Utilitarian Theories of the Bankruptcy Discharge

32Let us now turn from the kinds of moral complaints that a utilitarian theory of bankruptcy discharge
invites to the descriptive hurdles that it must struggle to surmount. How satisfactorily does a utilitarian
account of the bankruptcy discharge “fit with” the detailed doctrines that define when and how debtors
can secure a financial fresh start? How well does it explain the rules and exceptions that determine the
circumstances under which overburdened debtor can shed the yolk of insolvency? In short, what is its
descriptive power?

33It is useful to pause at the outset to ask why we would demand of a theory of an area of law that it
provide an apt description of its doctrines. What would such a description be good for? Historical
theories allow us to understand causal connections between the past and the present, and thus perhaps
give us some insight into what will be required to achieve desired changes in the future. Normative
theories provide us with reasoned principles that make intelligent reforms possible. But what good is a
theory that merely redescribes, in general or even in very fine-grained terms, the law that we presently
have? What good is achieved on behalf of tort law, for example, by Richard Posner’s description of
American negligence law as a set of “rules of liability that if followed will bring about, at least
approximately, the efficient—the cost justified—level of accidents and safety”?35

34One answer might be aesthetic. It is simply architectonically satisfying to find and articulate simple,
highly general descriptions of apparently labyrinthine rules. However true this may be, it surely does not
justify our time, or the time of any reader, for while one may be able to justify “art for art’s sake,” we
would think ourselves hard pressed to defend the claim that aesthetically elegant general restatements
of the law are either art in themselves, or goods that are of equal value to art.

35Another answer points to the distinct rule of law advantages that a descriptive theory provides.36 To
know the background principle that an area of law serves is to make the law considerably more
predictable to those who are subject to it. Inasmuch as increased predictability results in increased
liberty (because it makes more accurate planning possible), greater fairness (because the risk of
surprise is reduced), and the protection of equality (because it provides the criterion by which judges
can determine and treat like cases as alike), an appreciation of the deep function of law allows citizens
and judges to realize the core benefits of living under the rule of law.37
36Such rule of law advantages surely provide ample motivations to seek out general propositions about
the functions of the various areas of law, including bankruptcy law. But we think there is another reason
to seek a descriptive account of an area of law that is normatively important in another way. If one
succeeds in extracting from a complex amalgam of doctrines a general principle that makes (most of)
those doctrines conceptually and normatively compatible and does so in a manner that is better than
any other proposed principle, one stands in far better stead to assess the moral legitimacy of the area of
law as a whole, for one can sensibly do so by subjecting the simpler, more general principle that unites
its doctrines to moral scrutiny. Thus, for example, if one finds that the laws favored by Neo-Nazis are
maximally cohered by the principle that Aryan peoples deserve more advantages economically,
politically, socially, and legally than other peoples, one stands in a far better position to criticize that
corpus of proposed doctrines than one would if one simply took up the independent wisdom of each
proffered rule within the collection. All doctrines cohered by the general description of the law’s deep
function will morally stand or fall—and in this example, fall—together. If they fall together, as a moral
matter, their relative operational efficacy will not save them, nor will efforts to tinker with their details. If
they stand together, they may still be deemed unduly inefficient or otherwise practically defective, but at
least efforts to make them more effective will be morally worthy.

37If a utilitarian theory genuinely best fits the detailed doctrines of the bankruptcy discharge —if it
constitutes the best deep description of the fresh start accorded to debtors by bankruptcy law—then we
will have every reason to go back and examine with even more care the normative implications of that
theory. For we will know that we have a genuine choice to make; namely, we will know that we must
either resolve our moral complaints with a branch of law that sacrifices the fair treatment of some for the
increased wealth of others, or we must radically revise our institutional means of dealing with those who
find themselves hopelessly mired in debt, as no amount of mere doctrinal tinkering will answer the need
for a paradigmatic change in our response to insolvency. On the other hand, if utilitarian accounts are
ultimately ill at ease with the specifics of the fresh start doctrines of bankruptcy law, then we need not
linger any further over efforts to resolve their moral shortcomings. We will know that it is time to seek out
a new understanding of why we forgive our debtors, because the accounts that have dominated the
literature in recent decades fall short of explaining how we do so, when we do so, or why we do so.

38So now let us turn, in earnest, to the task of assessing the descriptive strength of utilitarian accounts
of the bankruptcy discharge. We cannot, in this article, canvass all of the doctrinal details of this area of
law, so let us focus on the adequacy with which utilitarian theories explain three long-standing
components or attributes of bankruptcy relief: (1) the inalienability of the right to debt relief; (2) the
requirement that a debtor affirmatively request (and pay for) such forgiveness; and (3) the stigmatizing
effects of being a bankrupt.

39First, can utilitarians readily account for the fact that the ability to discharge debts in bankruptcy
cannot be waived prospectively by the debtor?38 The mandatory nature of discharge relief is a well-
settled attribute of the American bankruptcy discharge,39 and thus, justifying this particular feature of
the discharge has been a central preoccupation of discharge theory. Utilitarians must be, and are,
uncomfortable with the ban on contractual waivers of discharge relief because they generally proceed
from the presumption that inasmuch as people know their own preferences better than anyone else,
freedom of contract will best maximize aggregate social welfare.
40Consider the popular utilitarian conception of the right of bankruptcy discharge as a form of credit
insurance, the premium of which is (efficiently) priced into the cost of credit and the effect of which is to
spread the losses from default in a way that maximizes aggregate social welfare. Bankruptcy relief, so
conceived, however, is mandatory credit insurance. And the typical utilitarian who favors freedom of
contract would say: “If I would rather self-insure against (i.e., be willing to suffer) the full consequences
of over-indebtedness and/or be very cautious in my use of credit, in exchange for having greater access
to credit and/or paying a lower interest rate when I do borrow, then I should be able to contractually
waive my right to receive a bankruptcy discharge.”40 Likewise, the utilitarian strategy of assigning credit
default losses to the superior risk bearer is also generally subject to the caveat that the parties should
be permitted, by contract, to reallocate the risks as they see fit.41

41To justify the ban on prospective waivers of discharge relief, therefore, utilitarians must assign some
species of market failure to discharge waivers. The most common account begins with an emphasis on
the cognitive and volitional defects to which those who seek credit are subject. As Douglas Baird puts it,
“debtors can make bad judgments when they borrow. The same bad judgment that leads to incurring
the debt may lead to waiving the right to a discharge.”42 If volitional and cognitive defects were the only
market failure at issue, though, that would hardly distinguish utilitarians’ brief for mandatory discharge
relief from that of hard paternalists, as both would simply agree “that the bankruptcy discharge is a way
of protecting individuals from themselves: it effectively shields them from the consequences of the
choices they make.”43

42Thus, the second step in utilitarians’ typical market-failure argument (necessary for it to be non-
paternalistic) is an externality story: Consumers’ congenital cognitive confusions and volitional vacuities
that might cause them to systematically under-insure (by systematically over-waiving discharge relief) is
a problem of the kind warranting (a non-paternalistic) invalidation of such waivers because of
externalities that the waivers would impose on others if over-burdened debtors could not obtain
(because they had contractually waived) discharge relief in bankruptcy.44 If the aggregate external
social welfare costs that discharge waivers would impose on others are greater than whatever
aggregate increases in social welfare would result from enforcing discharge waivers, then utilitarians
can swallow the ban on discharge waivers.

43To do so, utilitarians point to several externalities that might prevail in a waivable discharge world. For
each potential externality identified, though, there are skeptics who doubt whether that externality would
even exist (i.e., would even impose any social costs in a net all-things-considered aggregated effects
calculus) or would exist to such an extent as to exceed the aggregate social welfare benefits from
permitting contractual discharge waivers.

44For example, one of the principal potential externalities cited by mandatory discharge enthusiasts is
the ex post social loss of productivity and consumer spending power caused by over-burdened debtors’
reduced incentives to work (simply to pay their creditors).45 But non-bankruptcy federal law already
ensures that debtors can keep (and thus do not have to pay to their creditors) at least 75% (and some
states protect even more or all) of their take-home pay.46 Indeed, as Charles Hallinan has noted, “it is
doubtful that the costs [of productivity losses] are in fact externalized under ordinary circumstances,
since most decreases in productivity are usually internalized to the debtor in the form of lower
income.”47 Moreover, the fact that creditors might take some portion of debtors’ pay can actually create
the opposite effect of increasing debtors’ incentives to work harder in order to make more money.48
Whether the competing incentive effects of debt would produce more or less work in the aggregate in a
world in which discharge was waivable is an open empirical question. Indeed, as Adam Hirsch has
noted, “to the extent persons enjoy their jobs, or are simply habituated to a work routine, their
productivity may not suffer (or suffer as badly as we would expect) in the event of insolvency,”49 As
Katherine Porter has observed, “there is little evidence of how overindebtedness may affect labor
processes and productivity.”50 Thus, “it is not clear” whether the ban on discharge waivers “increase[s]
the aggregate incentive to work,” and some utilitarians, such as Richard Hynes, speculate that at the
end of the day the “marginal effect” from bankrupts’ work incentives is “probably not that important.”51

45Indeed, the impenetrability of the all-important empirical questions surrounding any potential
externality—the impact of financial distress on the debtor’s dependents,52 the degree to which over-
indebtedness forces debtors into public assistance programs,53 the probability that a class of hopeless
insolvents will foment social unrest,54 the weight of the systemic burden on entrepreneurship and
economic growth,55 etc.—especially as compared to the unknown (and perhaps unknowable)
aggregate social welfare gains from permitting contractual waivers of discharge relief, renders utilitarian
conclusions, at best, indeterminate.

46The same is true for an oft-proffered “adverse selection” explanation for the ban on discharge
waivers. The various permutations of the adverse-selection market failure are highly nuanced and
complex,56 but the basic intuition is easy to follow. Were discharge relief waivable by contract, so the
argument goes, “creditors would hardly wish to compete for those consumers insisting upon non-
waiver,”57 and thus even debtors willing to pay “extra” for preserving the ability to discharge their debt in
bankruptcy would find no takers for such debt contracts. As Richard Hynes and Eric Posner point out,
though, if such a market failure were a realistic threat, “it is hard to understand why there is such a
robust market in credit insurance.”58 More fundamentally, the precondition to market failure from
adverse selection is that debtors know their chances of default much better than their creditors and a
debtor’s willingness to waive discharge reveals determinative information regarding that debtor’s
chances of default that is otherwise unavailable to the creditor. As we discussed in Part I, though, given
modern creditors’ sophisticated credit-scoring technologies, creditors generally seem to be better
situated than debtors themselves to assess debtors’ default risks.59 Thus, the “asymmetrical
information” conditions necessary for an adverse-selection market failure seem highly dubious, as
others have observed.60

47If one’s point of departure, then, is a utilitarian presumption in favor of freedom of contract, one may
well conclude that the burden of overcoming that presumption has not been met because “the efficiency
explanations … are highly speculative.”61 And if utilitarians cannot confidently rely upon externalities or
adverse selection as market failure explanations for the mandatory discharge, a non-paternalistic
utilitarian response would have to abandon the law’s commitment to a mandatory nonwaivable
discharge.62 Of course, this still leaves the possibility that debtors’ borrowing decisions are affected by
pervasive cognitive defects that precipitate systematic over-borrowing (relative, that is, to the borrowing
that would occur if debtors always accurately estimated all relevant borrowing risks), but even that
proposition is questioned by some.63 If these cognitive biases are the true nub of the problem, though,
and do lead to over-borrowing (and would lead to over-waiving of discharge relief, if permissible), other
utilitarians such as Barry Adler suggest that soft paternalism is the appropriate policy response through
design of appropriate default rules regarding the availability of discharge relief (and corresponding
methods for and extent of waiver of those default rules) that seek to counter or curb debtors’ cognitive
biases while nonetheless permitting welfare-enhancing prospective contractual waivers of discharge
relief,64 consistent with the so-called “libertarian paternalism” (i.e., soft paternalism) agenda of many
behavioral economists.65

48What this tour of utilitarian theorizing reveals, therefore, is that utilitarian theory does not
enthusiastically and unambiguously embrace one of the most central, persistent, straightforward, and
un-nuanced features of American discharge law; namely, that the ability to obtain bankruptcy relief
through discharge of indebtedness simply is not prospectively waivable. As Richard Hynes has
observed, “a growing number of economists question whether the [mandatory] insurance that
bankruptcy provides improves consumer welfare.”66 Those who seek a theory that well explains the
inalienability of the right to bankruptcy discharge thus have grounds to look beyond utilitarianism, for as
this analysis makes clear, utilitarianism itself provides as many grounds to doubt its wisdom as to
embrace it.

49A second core attribute of our modern practice of bankruptcy discharge that proves a puzzle to
utilitarians is the fact that discharge of indebtedness must be requested by the debtor. Moreover, that
request is costly. Debtors must pay a substantial filing fee,67 and they must pay for and complete
privately-offered credit counseling and debtor education courses to receive a bankruptcy discharge.68
Most significantly, though, hiring a bankruptcy attorney is a practical necessity for successfully obtaining
discharge relief, and nearly all debtors do hire an attorney.69 If desperate debtors are, from a utilitarian
perspective, dead weights on society whose burdens turn them from wealth-production to leisure-
consumption, why do we not systematically and across-the-board forgive their debts without requiring of
them costly application efforts?

50Utilitarians can, of course, avail themselves of an epistemic argument to justify a debtor filing or
application requirement. They can insist that debtors know their own circumstances better than others
and so are best situated to know whether they are eventually likely to be able to satisfy their debts. They
can further argue that onerous application conditions will give reverse incentives to debtors to borrow
less and/or fulfill their debts, rather than externalizing them to others. Consider, for example, the popular
utilitarian paradigm of discharge relief as a form of credit insurance. Two moral hazards endemic to
insurance, as applied to bankruptcy as credit insurance, are sometimes dubbed the “grasshopper” and
the “opossum” problems. Insurance reduces an insured’s incentive to avoid the insured loss, and thus,
the availability of a bankruptcy discharge may cause “grasshopper” debtors to borrow (and consume)
more than they would were discharge relief unavailable. In addition, the more generous and forgiving
(and less costly) bankruptcy relief is, the more it may attract “opossum” debtors who could reasonably
repay their debts and thus do not actually “need” bankruptcy relief. Utilitarians, therefore, tend to justify
the costs of bankruptcy filings as (in their eyes) a healthy and desirable curb on the “grasshopper” and
“opossum” moral hazards.
51Yet starkly missing is the kind of precise calibration of costs vis-à-vis coverage benefits that would be
necessary to ensure that debtor filing costs in fact maximize aggregate societal welfare. Instead,
utilitarian justifications often appear to simply assume that more costs are better than fewer costs, and
that the point of imposing costs on hopeless debtors is to impose costs on hopeless debtors.70 While a
rose is a rose by any other name, any “explanation” of a legal practice that simply restates that practice
fails at the task of providing the kind of explanatory illumination demanded of an adequate descriptive
theory. As such, those seeking to understand why the American bankruptcy system would financially
burden those who are desperate to escape financial burdens must look beyond the utilitarian
explanations that have been proffered.

52A third prominent feature that demands the attention of any theory of personal bankruptcy concerns
another cost that debtors must incur in order to obtain bankruptcy relief. Such costs can, of course, also
be nonmonetary, and one of the more controversial aspects of bankruptcy relief that implicates the
proper role of imposing nonmonetary burdens on debtors is the seemingly perpetual debate regarding
the extent to which debtors are “stigmatized” by filing bankruptcy and whether such “stigma” is on the
decline. Debtor “stigma” is a complex psychological and sociological concept that is rarely unpacked
with any care or rigor, but the term is invoked to refer both to the personal shame that debtors
commonly experience when seeking and living in the shadow of bankruptcy relief and to the interrelated
societal opprobrium that is directed at those who avail themselves of their right to financial relief.

53Utilitarians tend to be extremely wary of efforts to eradicate the adverse collateral consequences of
filing bankruptcy and generally seek to preserve a substantial “stigma” for filing bankruptcy as a restraint
on both the “grasshopper” and “opossum” moral hazards. Indeed, much of the push surrounding the
2005 amendments to the American Bankruptcy Code centered on a controversial claim that rising
bankruptcy filings were attributable to declining “stigma,”71 which supposedly warranted imposition of a
series of new moral hazard controls. But any adequate theory of the law of debt forgiveness that is all-
too-casual in its treatment of the role of stigma will be unable to reckon with the historical evolution of
personal bankruptcy law; for it will be unable to make sense of the late Twentieth Century development
of what is essentially an anti-stigma statute—the American bankruptcy discrimination statute first
enacted in 1978.72

54The original impetus for the bankruptcy discrimination statute was the U.S. Supreme Court’s 1971
decision in Perez v. Campbell73 construing the effect of a federal bankruptcy discharge and expressly
overruling the Court’s earlier decisions to the contrary in Reitz v. Mealey74 and Kesler v. Department of
Public Safety.75 The Reitz, Kesler, and Perez decisions all dealt with challenges to state motorist
financial responsibility laws. Under those state statues, failure to pay a civil judgment arising out of an
automobile accident was grounds for suspension of the driver’s license of the judgment debtor. The
statutes provided that satisfaction of the judgment was a precondition to reinstatement of the debtor’s
license and specifically provided that a bankruptcy discharge of the judgment debt did not relieve the
debtor of this requirement.

55In striking down this last aspect of the state laws, Perez was an important interpretation of the scope
of relief afforded by discharging the legal obligation to repay a debt. The most fundamental aspect of
such a federal bankruptcy discharge of the legal obligation to repay a debt is, of course, extinguishing
the various legal remedies that the state supplies to the creditor for collection of the debt. Indeed, one
reading of Perez is that the state motorist financial responsibility laws at issue in Reitz, Kesler, and
Perez (while perhaps purporting to also be something else) were, in substance and effect, simply
creditor collection remedies that were necessarily rendered ineffectual by a bankruptcy discharge of the
debts at issue.76

56On that reading of Perez, it is a relatively restrained decision. However, many saw in Perez a much
broader principle—one designed to protect bankruptcy debtors from more than simply creditor collection
actions (whether overt or cleverly disguised, direct or indirect). On this more generous interpretation,
Perez stands for the proposition that the bankruptcy discharge should protect debtors from a host of
other adverse collateral consequences, whether or not those consequences are in any way connected
to the collection of discharged debts. Professor Boshkoff nicely articulated the implicit nondiscrimination
principle that many extracted from Perez as follows:

[Perez’s] major contribution to the jurisprudence of debtor rehabilitation is the recognition that activity by
someone other than a creditor … can impermissibly interfere with the “new opportunity in life and the
clear field for future effort, which it is the purpose of the bankruptcy act to afford the emancipated
debtor.” Such interference is improper even when the third party actor does not reap any financial
benefit from obstruction of the rehabilitation effort. It is the lessening of the beneficial effect of
bankruptcy, not any gain realized by the actor, that is crucial.77

57The patently nonutilitarian Commission on the Bankruptcy Laws of the United States (whose 1973
Report initiated the legislative process that ultimately led to enactment of the current U.S. Bankruptcy
Code in 1978) fully embraced this more general nondiscrimination interpretation of Perez and proposed
codifying the broadest conceivable ban on bankruptcy discrimination. The 1973 Commission’s proposed
bankruptcy discrimination statute would have affirmatively prohibited anyone from subjecting bankruptcy
debtors (or their friends or family or associates) to “discriminatory treatment” of any kind simply because
the debtor filed bankruptcy and obtained a discharge of indebtedness.78 By proposing to provide
bankruptcy debtors with a legal remedy for virtually any and all adverse collateral consequences from
filing for debt relief, the 1973 Commission clearly embraced a theory of debt forgiveness squarely at
odds with a utilitarian agenda.

58Congress did not, however, enact the 1973 Commission’s proposed bankruptcy discrimination
statute. Congress concurred in the general sentiment that “an automatic reaction against an individual
for availing himself of the protection of bankruptcy laws” is lamentable, but chose to only “prohibit[]
action by a governmental unit, such as the Federal Government, a State, a city, or any governmental
agency, that is based solely on the basis of a filing under … the bankruptcy code”79 and expressly
declined to “extend[] the prohibition to any [and all] discrimination, even by private parties.”80 In 1984,
though, Congress amended the bankruptcy discrimination statute “to extend the protections against
[employment] discrimination to persons employed in the private sector.”81 The courts, however, have
been incredibly stingy in their implementation of this ban on private employment discrimination, to the
point of even ignoring plain statutory language clearly prohibiting certain discriminatory acts.82

59One might be tempted to explain the uneven development of the bankruptcy discrimination statute as
simply a flash point in a conflict between the dominant utilitarian conception of bankruptcy relief and the
conceptions of those who embrace an alternative “rehabilitationist” agenda. But, in truth, the bankruptcy
discrimination statute seems to refute both utilitarians and rehabilitationists. The very existence of the
bankruptcy discrimination statute runs counter to the utilitarian notion that there is social utility in
perpetuating the “stigma” that attaches to bankruptcy relief. But Congress’s clear rejection of the 1973
Commission’s manifestly rehabilitationist version of the bankruptcy discrimination statute suggests that
normative values are in play that are not explained by either utilitarian or rehabilitationist theory, which
compete for dominance as normative paradigms.

60While this cursory survey of a few descriptive inadequacies of utilitarian theories hardly suffices to
establish that utilitarianism is not up to the task of providing an explanation of existing discharge
doctrines, it is a beginning in making the case that core aspects and attributes of the law of personal
debt relief are ill at ease with the agenda that modern law and economics scholars set for it. While a
considerably more comprehensive analysis of the fit that can be achieved between utilitarianism and
bankruptcy discharge law would be required to prove our point, we take the above examples to raise
real doubts about the ease with which a utilitarian understanding of the objective of debt forgiveness can
be harmoniously married to the existing doctrines that provide that right. When added to our normative
complaints with utilitarian justifications for transferring debts from the “have-nots” to the “haves,” these
concerns certainly suffice to motivate a search for an alternative understanding of our law of debt relief.

Conclusion

61Our purpose in this piece has not been to advance a positive theory of the law of bankruptcy
discharge. Our purpose has not even been to canvass the difficulties that all existing theories of
bankruptcy discharge have confronted so as to develop a comprehensive list of the obstacles that a
new positive theory would need to surmount. Instead, our more modest goal has been to probe the
merits of the utilitarian theory that has dominated the legal literature on debt relief ever since law and
economics came to prominence. As we have argued, the utilitarian agenda that is ascribed to the
personal discharge doctrines by law and economics scholars who work within the field of bankruptcy law
raises both normative concerns and descriptive tensions. Together, these problems beckon theorists
who are interested in understanding when and why we forgive debts to offer alternative accounts of our
system of debt relief. Elsewhere, we do just that. 83 Our project here has been to clear the way for that
more ambitious project by demonstrating that the utilitarianism that undergirds the most prominent
contributions to the literature leaves considerable room for improvement when it comes to
understanding both why and under what circumstances we should give fresh starts to those who have
failed at meeting their financial obligations.

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Georgetown Journal of Law and Public Policy, 14 (2017)

Hurd, Heidi M. “Is It Wrong To Do Right When Others Do Wrong?,” Legal Theory, 7 (2001)

Hurd, Heidi M. “Promises Schmomises,” Law and Philosophy, 36 (2017)

Hynes, Richard “Bankruptcy and State Collections: The Case of the Missing Garnishments,” Cornell
Law Review, 91 (2006)

Hynes, Richard “Non-Procrustean Bankruptcy,” University of Illinois Law Review, 2004 (2004)

Hynes, Richard “Overoptimism and Overborrowing,” BYU Law Review, 2004 (2004)
Hynes, Richard M. ”Optimal Bankruptcy in a Non-Optimal World,” Boston College Law Review, 44
(2002)

Hynes, Richard and Posner, Eric “The Law and Economics of Consumer Finance,” American Law and
Economics Review, 4 (2002)

Jackson, Thomas “The Fresh-Start Policy in Bankruptcy Law,” Harvard Law Review, 98 (1985)

Jones, Judge Edith H. and Zywicki, Todd J. “It’s Time for Means-Testing,” BYU Law Review, 1999
(1999)

Levitin, Adam J. “The Antitrust Super Bowl: America’s Payment Systems, No-Surcharge Rules, and the
Hidden Costs of Credit,” Berkeley Business Law Journal, 3 (2005)

Lupica, Lois “The Consumer Bankruptcy Fee Study: Final Report,” American Bankruptcy Institute Law
Review, 20 (2012)

Maki, Dean M. “The Growth of Consumer Credit and the Household Debt Service Burden,” Finance and
Economics Discussion Series, 2000-12, available at http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=221416.

Meckling, William H. “Financial Markets, Default, and Bankruptcy: The Role of the State,” Law and
Contemporary Problems, 41 (1977)

Porter, Katherine “The Damage of Debt,” Washington and Lee Law Review, 69 (2012)

Posner, Eric “Contract Law in the Welfare State: A Defense of the Unconsciability Doctrine, Usury Laws,
and Related Limitations on the Freedom to Contract,” The Journal of Legal Studies, 24 (1995)

Posner, Richard “A Theory of Negligence,” The Journal of Legal Studies, 1 (1972)

Rabinowicz, Wlodek and Österberg, Jan “Value Based on Preferences,” Philosophy and Economics, 12
(1996)

Rea, Jr., Samuel A. “Arm-Breaking, Consumer Credit and Personal Bankruptcy,” Economic Inquiry, 22
(1984)

Schuchman, Philip “An Attempt at a ‘Philosophy of Bankruptcy,’” UCLA Law Review, 21 (1973)

Simkovic, Michael “The Effect of BAPCPA on Credit Card Industry Profits and Prices,” American
Bankruptcy Law Journal, 83 (2009)

Sunstein, Cass R. “Boundedly Rational Borrowing,” University of Chicago Law Review, 73 (2006)

Sunstein, Cass R. and Thaler, Richard H. “Libertarian Paternalism Is Not an Oxymoron,” University of
Chicago Law Review, 70 (2003)
Tabb, Charles J. “The Scope of the Fresh Start in Bankruptcy: Collateral Conversions and the
Dischargeability Debate,” George Washington Law Review, 59 (1990)

Tabb, Charles J., “Of Contractarians and Bankruptcy Reform: A Skeptical View,” American Bankruptcy
Institute Law Review, 12 (2004)

Warren, Elizabeth “The Market for Data: The Changing Role of Social Sciences in Shaping the Law,”
Wisconsin Law Review, 2002 (2002)

Warren, Elizabeth “The Phantom $400,” Journal of Bankruptcy Law and Practice, 13(2) (2004)

Weistart, John “The Costs of Bankruptcy Law,” Law and Contemporary Problems, 41 (1977)

Weston, J. Fred “Some Economic Fundamentals for an Analysis of Bankruptcy,” Law and Contemporary
Problems, 41 (1977)

White, Michelle J. “Abuse or Protection? Economics of Bankruptcy Reform Under BAPCPA,” University
of Illinois Law Review, 2007 (2007)

Witt, John Fabian “Review Essay: Narrating Bankruptcy/Narrating Risk,” Northwestern University Law
Review, 98 (2003)

Zywicki, Todd, J. “An Economic Analysis of the Consumer Bankruptcy Crisis,” Northwestern University
Law Review, 99 (2005)

Zywicki, Todd J. “Institutions, Incentives, and Consumer Bankruptcy Reform,” Washington and Lee Law
Review, 62 (2005)

Zywicki, Todd J. “The Economics of Credit Cards,” Chapman Law Review, 3 (2000)

Books

Adler, Barry E., Baird, Douglas G. and Jackson, Thomas H., Bankruptcy: Cases, Problems, and
Materials (Foundation Press, 4th ed., 2007)

Balleisen, Edward, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America
(University of North Carolina Press, 2001)

Bentham, Jeremy, An Introduction to the Principles of Morals and Legislation, ed. P. Schofield
(Chickasaw, White Dog Publishing, 2010)

Collier on Bankruptcy, ed. J. Moore (New York, Matthew Bender, 14th ed., 1978), vol. 1A

Hausman, Daniel, Preferences, Value, Choice, and Welfare (Cambridge University Press, 2010)

Hurd, Heidi M. and Brubaker, Ralph, The Virtue of Bankruptcy (Oxford University Press, forthcoming)
Kant, Immanuel, Groundwork for the Metaphysics of Morals, ed. C. Korsgaard (Cambridge University
Press, 2012)

Mann, Bruce H., Republic of Debtors: Bankruptcy in the Age of American Independence (Harvard
University Press, 2003)

Mann, Ronald J., Charging Ahead: The Growth and Regulation of Payment Card Markets (Cambridge
University Press, 2006)

Mill, John Stuart, Utilitarianism, ed. G. Sher (Renaissance Classics, 2012)

Moore, Michael S., Placing Blame: A Theory of the Criminal Law (Oxford University Press, 1997)

Sheldon, Jonathan, et al., Collection Actions: Defending Consumers and Their Assets (Boston, National
Consumer Law Center, 4th ed., 2017)

Skeel, David A., Debt’s Dominion: A History of Bankruptcy Law in America (Princeton University Press,
2001)

Sunstein, Cass R., Choosing Not to Choose (Oxford University Press, 2015)

Sunstein, Cass R., Why Nudge? (Yale University Press, 2012)

Thaler, Richard H. and Sunstein, Cass R., Nudge (Penguin Books, 2008)

Chapters of Books

“Additional Dissent to Recommendations for Reform of Consumer Bankruptcy Law Submitted by

Honorable Edith H. Jones and Commissioner James I. Shepard,” in National Bankruptcy Review
Commission, Final Report, Bankruptcy: The Next Twenty Years (National Bankruptcy Review
Commission, Oct. 20, 1997)

Hausman, Daniel and McPherson, Michael, “The Philosophical Foundations of Mainstream Normative
Economics,” in The Philosophy of Economics, ed. D. Hausman (Cambridge University Press, 2008)

Hurd, Heidi M., “Living With Genius: The Life and Work of Michael S. Moore,” in Legal, Moral and
Metaphysical Truths: The Philosophy of Michael Moore , eds. K. Ferzan and S. Morse (Oxford University
Press, 2016)

Hurd, Heidi M., “The Virtue of Consumer Bankruptcy,” in A Debtor World: Interdisciplinary Perspectives
on Debt, eds. R. Brubaker, R. Lawless and C. Tabb (Oxford University Press, 2012)

Lawless, Robert, “Striking Out on Their Own: The Self-Employed in Bankruptcy,” in Broke: How Debt
Bankrupts The Middle Class, ed. K. Porter (Stanford University Press, 2012)
Littwin, Angela, “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System,” in Broke: How Debt
Bankrupts the Middle Class, ed. K. Porter (Stanford University Press, 2012)

Mann, Ronald J., “Indirect Approaches: Regulating Interchange and Encouraging Surcharges ,” in Mann,
Ronald, J., Charging Ahead: The Growth and Regulation of Payment Card Markets Around the World
(Cambridge University Press, 2006)

“Recommendations for Reform of Consumer Bankruptcy Law by Four Dissenting Commissioners,” in

National Bankruptcy Review Commission, Final Report, Bankruptcy: The Next Twenty Years (National
Bankruptcy Review Commission, Oct. 20, 1997)

Cases, Statutes and Legislative Reports

11 U.S.C. §§ 109(h), 521(b)(1), 525, 727(a)(10), 727(a)(11), 1328(a)

28 U.S.C. §§ 1930(a)(1), 1930(a)(3)

H.R. Rep. No. 95-595 (1977)

Report of the Commission on the Bankruptcy Laws of the United States , H.R. Doc. No. 93-137
(Washington, D.C., U.S. Government Printing Office, 1973)

S. Rep. No. 95-989 (1978)

S. Rep. No. 98-65 (1983)

Federal National Bank v. Koppel, 253 Mass. 157 (1925)

Kesler v. Department of Public Safety, Financial Responsibility Division, State of Utah, 369 U.S. 153
(1962)

Local Loan Co. v. Hunt, 292 U.S. 234 (1934)

Perez v. Campbell, 402 U.S. 637 (1971)

Reitz v. Mealey, 314 U.S. 33 (1941)

Haut de page

Notes

1 Bentham famously began the first chapter of An Introduction to the Principles of Morals and
Legislation as follows:

“Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for
them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand
the standard of right and wrong, on the other the chain of causes and effects, are fastened to their
throne. They govern us in all we do, in all we say, in all we think ....”

Bentham, Jeremy, An Introduction to the Principles of Morals and Legislation, ed. P. Schofield
(Chickasaw, White Dog Publishing, 2010), p. 1.

2 Mill declared that “[t]he creed which accepts as the foundation of morals ‘utility’ or the ‘greatest
happiness principle’ holds that actions are right in proportion as they tend to promote happiness; wrong
as they tend to produce the reverse of happiness.” But he insisted that happiness must be distinguished
from pleasures “worthy only of swine,” for “[h]uman beings have faculties more elevated than the animal
appetites and, when once made conscious of them, do not regard anything as happiness which does
not include their gratification.” Mill, John Stuart, Utilitarianism, ed. G. Sher (Renaissance Classics,
2012), p. 7.

3 See Hausman, Daniel, Preferences, Value, Choice, and Welfare (Cambridge University Press, 2010);
Hausman, Daniel and McPherson, Michael “Preference Satisfaction and Welfare Economics,”
Economics and Philosophy, 25 (2009), pp. 1-25; Hausman, Daniel and McPherson, Michael, “The
Philosophical Foundations of Mainstream Normative Economics,” in The Philosophy of Economics, ed.
D. Hausman (Cambridge University Press, 2008), pp. 226-250; Rabinowicz, Wlodek and Österberg, Jan
“Value Based on Preferences,” Philosophy and Economics, 12 (1996), pp. 1-27.

4 Howard, Margaret “A Theory of Discharge in Consumer Bankruptcy,” Ohio State Law Journal, 48
(1987), p. 1069.

5 Howard, M., “A Theory of Discharge,” p. 1069. Howard also insists that an economic approach to
bankruptcy is itself non-normative and “avoids the difficulties of normatively-based discharge policy.”
Howard, M., “A Theory of Discharge,” p. 1069. This is an unfortunate claim, for an economic approach
to anything is itself in need of a normative defense, and the best normative defense typically available is
predicated on utilitarianism—a theory that is of robust standing within our great moral traditions.

6 Howard, M., “A Theory of Discharge,” p. 1088.

7 Howard, M., “A Theory of Discharge,” p. 1069.

8 Jackson, Thomas “The Fresh-Start Policy in Bankruptcy Law,” Harvard Law Review, 98 (1985), p.
1393. This utilitarian rationale is one of two justifications for which Jackson’s piece is known, the other
being a contractarian argument.

9 Jackson, T., “The Fresh Start Policy,” p. 1420. John Weistart notes that “excessive debt, with its
attendant pressure on family and emotional stability and job security, . . . [might] so inhibit productivity
that there would be a net social gain from terminating costly collection actions, excusing the debts, and
giving the poorer-but-wiser debtor a second chance.” Weistart, John “The Costs of Bankruptcy Law,”
Law & Contemporary Problems, 41 (1977), p. 111. See also Georgakopoulos, Nicholas L. “Bankruptcy
Law for Productivity,” Wake Forest Law Review, 37 (2002), pp. 55-66; Hynes, Richard and Posner, Eric
“The Law and Economics of Consumer Finance,” American Law and Economics Review, 4 (2002), p.
186.

10 Cumming, Douglas “Measuring the Effect of Bankruptcy Laws on Entrepreneurship Across

Countries,” Journal of Entrepreneurial Finance, 16 (2012), p. 5; see also Armour, John and Cumming,
Douglas “Bankruptcy Law and Entrepreneurship,” American Law and Economics Review, 10 (2008), p.
303; Ayotte, Kenneth “Bankruptcy and Entrepreneurship: The Value of a Fresh Start,” Journal of Law,
Economics and Organization, 23 (2007), p. 161; Armour, John “Personal Insolvency Law and the
Demand for Venture Capital,” European Business Organization Law Review, 5 (2004), p. 87;
Czarnetzky, John “The Individual and Failure: A Theory of the Bankruptcy Discharge,” Arizona State
Law Journal, 32 (2000), p. 393; Fan, Wei and White, Michelle J. “Personal Bankruptcy and the Level of
Entrepreneurial Activity,” Journal of Law and Economics, 46 (2003), p. 543. Francis Buckley suggests
that this utilitarian justification may have a broader application than our traditional conception of
entrepreneurs: “Since job loss is the most frequent cause of default, bankruptcy might be a particularly
useful incentive device in attracting employees to work in high-risk jobs, such as start-up ventures.”
Buckley, F.H. “The Debtor As Victim,” Cornell Law Review, 87 (2002), p. 1089.

11 Tabb, Charles J. “The Scope of the Fresh Start in Bankruptcy: Collateral Conversions and the
Dischargeability Debate,” George Washington Law Review, 59 (1990), p. 100.

12 See Lawless, Robert, “Striking Out on Their Own: The Self-Employed in Bankruptcy,” in Broke: How
Debt Bankrupts The Middle Class, ed. K. Porter (Stanford University Press, 2012).

13 See Federal Deposit Insurance Corporation, Evaluating the Consumer Lending Revolution (2003),
available at http://www.fdic.gov/bank/analytical/fyi/2003/091703fyi.html; Maki, Dean M. “The Growth of
Consumer Credit and the Household Debt Service Burden,” Finance and Economics Discussion Series,
2000-12, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=221416.

14 See generally Feibelman, Adam “Consumer Bankruptcy as Development Policy,” Seton Hall Law
Review, 39 (2009), p. 100 (noting, though, “that there is surprisingly little data about the effects of
bankruptcy on consumer behavior and on the pricing of credit”).

15 Eisenberg, Theodore “Bankruptcy Law in Perspective,” UCLA Law Review, 28 (1981), p. 982.

16 “Consumer creditors are specialists in monitoring the consumer’s asset position and his record of
repayment. They are also specialists in collection of debts and are in a position to withhold future credit
when there is default. Finally, vendors who extend credit are in the best position to mitigate the losses
upon default because they are in a favorable position to resell repossessed goods.” Rea, Jr., Samuel A.
“Arm-Breaking, Consumer Credit and Personal Bankruptcy,” Economic Inquiry, 22 (1984), p. 192.

17 “Most debts are the result of the deliberate investment policy of creditors. The creditors are typically
large enterprises whose chosen business it is to lend money for profit by way of interest and, when
money is in short supply or difficult to obtain for a particular debtor, often by way of option to have an
equity share of the debtor’s business.” Schuchman, Philip “An Attempt at a ‘Philosophy of Bankruptcy,’”
UCLA Law Review, 21 (1973), p. 428.
18 See Mann, Ronald J., Charging Ahead: The Growth and Regulation of Payment Card Markets
(Cambridge University Press, 2006), pp. 200-04; Howard, M., “A Theory of Discharge,” pp. 1063-68;
Jackson, T., “Fresh-Start Policy,” p. 1400. On the significant technological advances facilitating higher
volume, greater diversification, and more accurate risk/pricing determinations in consumer lending, see
Baird, Douglas G. “Technology, Information, and Bankruptcy,” University of Illinois Law Review, 2007
(2007), pp. 311-15.

19 Adler, Barry E. “Bankruptcy Primitives,” American Bankruptcy Institute Law Review, 12 (2004), p.
233.

20 Weistart, J., “The Costs of Bankruptcy Law,” p. 109.

21 “Consumers frequently borrow to increase current consumption or in order to finance a consumer

durable or a home. If a reduction in future income occurs because of random events such as illness or
unemployment, the consumer would wish to include a clause in his loan contract that would allow for
partial or total forgiveness of debts if his permanent income falls.” Rea, Jr., S., “Arm-Breaking,
Consumer Credit and Personal Bankruptcy,” p. 191. “[T]he ability of a debtor to protect some of his
assets from attachment and to discharge his debt through bankruptcy proceedings may be viewed as
implicit insurance.” Rea, Jr., S., “Arm-Breaking, Consumer Credit and Personal Bankruptcy,” p. 188.

22 See, e.g., Adler, Barry, et al. “Regulating Consumer Bankruptcy: A Theoretical Inquiry,” Journal of
Legal Studies, 29 (2000), p. 585; Hallinan, Charles G. “The ‘Fresh Start’ Policy in Consumer
Bankruptcy: A Historical Inventory and an Interpretive Theory,” University of Richmond Law Review, 21
(1986), p. 49; Hynes, Richard M. ”Optimal Bankruptcy in a Non-Optimal World,” Boston College Law
Review, 44 (2002), p. 1; White, Michelle J. “Abuse or Protection? Economics of Bankruptcy Reform
Under BAPCPA,” University of Illinois Law Review, 2007 (2007), p. 275.

23 Howard, M., “A Theory of Discharge,” p. 1067.

24 Hurd, Heidi M. “Promises Schmomises,” Law and Philosophy, 36 (2017), p. 279.

25 “A promise to repay money is an important legal and moral obligation, neither lightly to be
undertaken nor lightly cast away. Filing bankruptcy represents a decision to repudiate promises made in
exchange for goods, services, and other promises. Of such promises and reciprocity is the fabric of civil
society woven.” Jones, Judge Edith H. and Zywicki, Todd J. “It’s Time for Means-Testing,” BYU Law
Review, 1999 (1999), p. 181.

26 Kant considered promise-keeping to be one of the paramount moral obligations, and promise-
breaking, therefore, to be a paradigmatic moral wrong, however trivial the promise and compelling the
justification. See Kant, Immanuel, Groundwork for the Metaphysics of Morals , ed. C. Korsgaard
(Cambridge University Press, 2012).

27 Witt, John Fabian “Review Essay: Narrating Bankruptcy/Narrating Risk,” Northwestern University
Law Review, 98 (2003), p. 310 (quoting Balleisen, Edward, Navigating Failure: Bankruptcy and
Commercial Society in Antebellum America (University of North Carolina Press, 2001), pp. 96-97, in a
review of Balleisen’s book and the books of Mann, Bruce H., Republic of Debtors: Bankruptcy in the Age
of American Independence (Harvard University Press, 2003), and Skeel, David A., Debt’s Dominion: A
History of Bankruptcy Law in America (Princeton University Press, 2001)).

28 For an extensive literature that celebrates this conclusion, see the work on “nudging” inspired by
Thaler, Richard H. and Sunstein, Cass R., Nudge (Penguin Books, 2008); Sunstein, Cass R., Why
Nudge? (Yale University Press, 2012); Sunstein, Cass R., Choosing Not to Choose (Oxford University
Press, 2015).

29 For a menu of such complaints, see Hurd, Heidi M. “Fudging Nudging: Why Libertarian Paternalism
Is the Contradiction It Claims It’s Not,” Georgetown Journal of Law and Public Policy, 14 (2017), p. 703.

30 See Hurd, Heidi M. “Is It Wrong To Do Right When Others Do Wrong?,” Legal Theory, 7 (2001), pp.
307-40.

31 The extent to which discharge of debt in bankruptcy actually translates into higher borrowing costs
for others is, of course, a less-than-transparent empirical question, famously captured in the credit
industry’s widely touted (and highly dubious) “$400 bankruptcy tax,” concocted in the massive lobbying
press for the 2005 amendments to the bankruptcy laws. See generally Warren, Elizabeth “The Market
for Data: The Changing Role of Social Sciences in Shaping the Law,” Wisconsin Law Review, 2002
(2002), pp. 13-20; Warren, Elizabeth “The Phantom $400,” Journal of Bankruptcy Law and Practice ,
13(2) (2004). To get at this empirical issue accurately, one would need to be able to compare the
amount of debt discharged in bankruptcy with the amount that would be collected on those debts if there
were no institution of bankruptcy discharge. That amount is certainly a positive sum, but nowhere near
100% of the discharged debt, the bulk of which is likely uncollectible in any event. Armed with an
estimate of this amount (if such a completely counter-factual amount could be accurately estimated),
one would also need to know how creditor costs (and losses) impact prices and other credit terms in a
competitive market.

32 Hynes, Richard “Optimal Bankruptcy,” p. 18. See generally Hynes, Richard “Non-Procrustean
Bankruptcy,” University of Illinois Law Review, 2004 (2004), pp. 335-39; Hynes, Richard “Optimal
Bankruptcy,” pp. 17-19; Meckling, William H. “Financial Markets, Default, and Bankruptcy: The Role of
the State,” Law and Contemporary Problems, 41 (1977), p. 13.; Weston, J. Fred “Some Economic
Fundamentals for an Analysis of Bankruptcy,” Law and Contemporary Problems, 41 (1977), p. 47. The
unique nature of credit card lending, however, may mean that credit card lenders (and their investors)
ultimately bear a larger portion of any marginal losses attributable to bankruptcy discharges. See Mann,
R., Charging Ahead, pp. 200-03; Ausubel, Lawrence M. “Credit Card Defaults, Credit Card Profits, and
Bankruptcy,” American Bankruptcy Law Journal, 71 (1997), p. 249; Ausubel, Lawrence M. “The Failure
of Competition in the Credit Card Market,” American Economics Review, 81 (1991), p. 50 ; Simkovic,
Michael “The Effect of BAPCPA on Credit Card Industry Profits and Prices,” American Bankruptcy Law
Journal, 83 (2009), p. 1. For a contrary assessment, see Zywicki, Todd J. “The Economics of Credit
Cards,” Chapman Law Review, 3 (2000), p. 79.

33 See Howard, M., “A Theory of Discharge,” pp. 1067-68; Hallinan, C.G., “‘Fresh Start’ Policy,” pp.
106-07.
34 And note that if the costs of default are spread not just to other borrowers through increased credit
prices but to all consumers generally through increased prices of goods and services, those who always
pay in cash are forced to participate in a social credit insurance system that offers them no safety net at
all. On the potential for cross-subsidization of credit-card users by customers using other forms of
payment, see Mann, Ronald J., “Indirect Approaches: Regulating Interchange and Encouraging
Surcharges,” in Mann, R., Charging Ahead; Levitin, Adam J. “The Antitrust Super Bowl: America’s
Payment Systems, No-Surcharge Rules, and the Hidden Costs of Credit,” Berkeley Business Law
Journal, 3 (2005), p. 265.

35 Posner, Richard “A Theory of Negligence,” The Journal of Legal Studies, 1 (1972), p. 33.

36 This is an argument advanced by Michael Moore when defending his own effort to boil down the
complex doctrines of Anglo-American criminal law to the claim that the function of that law is to match
punishments to the moral deserts of wrongdoers. Moore, Michael S., Placing Blame: A Theory of the
Criminal Law (Oxford University Press, 1997), pp. 3-83. For an overview of Moore’s retributivist project,
see Hurd, Heidi M., “Living With Genius: The Life and Work of Michael S. Moore,” in Legal, Moral and
Metaphysical Truths: The Philosophy of Michael Moore , eds. K. Ferzan and S. Morse (Oxford University
Press, 2016).

37 As Moore argues, “Judges thus have some prima facie reason to regard deep, descriptive theories
as part of the law that authoritatively binds them as judges, for doing so serves the values served by
having law at all (the rule of law virtues). If this is right, then legal scholars have a very practical, non-
aesthetic reason to propound descriptive theories of an area of law: it helps judges find those unobvious
standards that bind them as judges.” Moore, M., Placing Blame, pp. 12-13.

38 The American bankruptcy statute gives effect to a debtor’s waiver of discharge relief only if the
bankruptcy court approves the waiver, the waiver is in writing, and the debtor executed the waiver after
the debtor filed bankruptcy. See 11 U.S.C. §§ 727(a)(10), 1328(a).

39 The prospective nonwaivability of discharge relief was established under the Bankruptcy Act of 1898,
the predecessor of the current American Bankruptcy Code. See Collier on Bankruptcy, ed. J. Moore
(New York, Matthew Bender, 14th ed., 1978), vol. 1A, p. 1761; Federal National Bank v. Koppel, 253
Mass. 157, 159 (1925).

40 See, e.g., Adler, B., “Bankruptcy Primitives,” p. 238; Hallinan, C.G., “‘Fresh Start’ Policy,” p. 81.

41 See Harris, Steven L. “A Reply to Theodore Eisenberg’s Bankruptcy Law in Perspective,” UCLA Law
Review, 30 (1982), p. 363; Jackson, T., “Fresh-Start Policy,” pp. 1399-1401.

42 Baird, Douglas G. “Discharge, Waiver, and the Behavioral Undercurrents of Debtor-Creditor Law,”
University of Chicago Law Review, 73 (2006), p. 26. See also Tabb, Charles J. “Of Contractarians and
Bankruptcy Reform: A Skeptical View,” American Bankruptcy Institute Law Review, 12 (2004), pp. 263-
66; Hallinan, C.G., “‘Fresh Start’ Policy,” pp. 113-16.

43 Baird, D., “Discharge, Waiver, and Behavioral Undercurrents,” p. 24.

44 See Hallinan, C.G., “‘Fresh Start’ Policy,” pp. 117-18.

45 See Tabb., C., “Contractarians and Bankruptcy Reform,” p. 266; Tabb, C., “Scope of the Fresh
Start,” p. 94.

46 See generally Sheldon, Jonathan, et al., Collection Actions: Defending Consumers and Their Assets
(Boston, National Consumer Law Center, 4th ed., 2017), § 14.2.

47 Hallinan, C.G., “‘Fresh Start’ Policy,” p. 119.

48 If the debtor’s response to debt is to work less, economists call this a “substitution” or “price” effect,
but if the debtor’s response is to work more, they call that a “wealth” or “income” effect. See Hynes, R.,
“Non-Procrustean Bankruptcy,” p. 322.

49 Hirsch, Adam J. “Inheritance and Bankruptcy: The Meaning of the Fresh Start,” Hastings Law
Journal, 45 (1994), p. 208 n.99.

50 Porter, Katherine “The Damage of Debt,” Washington and Lee Law Review, 69 (2012), p. 989.

51 Hynes, R., “Non-Procrustean Bankruptcy,” p. 341. As Hynes points out, to accurately get at the
aggregate work effects of the nonwaivable discharge, you not only have to consider the ex post effects
on defaulting debtors who (hypothetically) could not discharge their debts because of contractual
waivers, you also have to consider the ex ante (pre-default) work incentive effects for all debtors from
the prospect of being able to discharge debt under a mandatory discharge regime. Hynes, R., “Non-
Procrustean Bankruptcy,” pp. 322-23. See also Hynes, R., “Optimal Bankruptcy,” p. 74 (noting that “as a
matter of theory, one cannot conclude that a collection system with a high marginal [debt payment] rate
discourages more work than one with a low marginal rate” because “the correct method of taxing a
bankrupt debtor’s income depends critically on empirical assumptions”).

52 See Jackson, T., “Fresh-Start Policy,” p. 1419. But see Hallinan, C.G., “‘Fresh Start’ Policy,” p. 119
n.270 (“While the existence of such externalities is plausible, they provide at most a highly limited
explanation for the preclusion of self-insurance effected by the existing nonwaivability of discharge
rights.”); Porter, K., “Damage of Debt,” p. 991 (noting that the evidence of such an externality “is thin”).

53 See Hallinan, C.G., “‘Fresh Start’ Policy,” pp. 120-23; Jackson, T., “Fresh-Start Policy,” pp. 1401-03.
But see Carlson, David G. “Philosophy in Bankruptcy,” Michigan Law Review, 85 (1987), p. 1375
(countering that “it seems a fair assumption that able-bodied workers who prefer to quit their jobs if
garnished will turn to the underground economy long before they apply to welfare”); Hynes, R., “Non-
Procrustean Bankruptcy,” p. 342 (opining that “it strains credibility to argue that [debtors] must be
allowed to retain all of their future income or else they will choose to rely on public assistance or work at
a job that pays them a fairly small cash income; public assistance is not that generous”).

54 See Hynes, R. and Posner, E., “The Law and Economics of Consumer Finance,” p. 186; Tabb, C.,
“Scope of the Fresh Start,” pp. 94-95. But see Hirsch, A., “Inheritance and Bankruptcy,” p. 203 n.88
(opining that the “continued relevance of these early political concerns is … dubious in the latter-day
republic, with its stronger state apparatus”).

55 See Czarnetzky, J., “The Individual and Failure,” pp. 451-52. But see Adler, B., “Bankruptcy
Primitives,” p. 238 (ability to waive discharge might make more and/or cheaper loans available to
entrepreneurs).

56 See generally Hynes, R. and Posner, E., “The Law and Economics of Consumer Finance,” pp. 173-
76.

57 Braucher, Jean “Response to Eric Posner,” Fordham Journal of Corporate and Financial Law, 7
(2002), p. 466.

58 Hynes, R. and Posner, E., “The Law and Economics of Consumer Finance,” p. 186. See also
Hallinan, C.G., “‘Fresh Start’ Policy,” p. 111 n.250.

59 See supra notes 16-18 and accompanying text.

60 See, e.g., Hynes, Richard “Overoptimism and Overborrowing,” BYU Law Review, 2004 (2004), p.
127 n.34; Adler, Barry E., Baird, Douglas G. and Jackson, Thomas H., Bankruptcy: Cases, Problems,
and Materials (Foundation Press, 4th ed., 2007), p. 563.

61 Buckley, F.H. “The American Fresh Start,” Southern California Interdisciplinary Law Journal, 4
(1994), p. 88.

62 See, e.g., Adler, B., et al., “Regulating Consumer Bankruptcy,” pp. 589, 599-600, 609; Meckling,
W.H., “Financial Markets, Default, and Bankruptcy,” pp. 28-29; Posner, Eric “Contract Law in the
Welfare State: A Defense of the Unconsciability Doctrine, Usury Laws, and Related Limitations on the
Freedom to Contract,” The Journal of Legal Studies, 24 (1995), p. 285 (noting that the “nonwaivable
right to discharge in bankruptcy” has “generally resisted efforts to rationalize [it] on economic grounds”).

63 See Buckley, F.H., “The American Fresh Start,” p. 87; Hynes, R., “Overoptimism and
Overborrowing,” p. 127. As Adam Hirsch has pointed out, “the empirically verified phenomenon of risk
aversion … could just as easily incline persons toward conservative borrowing.” Hirsch, A., “Inheritance
and Bankruptcy,” p. 206 n.4. Indeed, borrower risk aversion is what motivates utilitarians’
entrepreneurial-incentive explanation for discharge relief. See supra notes 10-11 and accompanying
text.

64 See, e.g., Adler, B., “Bankruptcy Primitives,” pp. 234-35, 236-39.

65 See generally Baird, D., “Technology, Information, and Bankruptcy,” pp. 318-20; Sunstein, Cass R.
and Thaler, Richard H. “Libertarian Paternalism Is Not an Oxymoron,” University of Chicago Law
Review, 70 (2003), p. 1159; Sunstein, Cass R. “Boundedly Rational Borrowing,” University of Chicago
Law Review, 73 (2006), p. 249.
66 Hynes, Richard “Bankruptcy and State Collections: The Case of the Missing Garnishments,” Cornell
Law Review, 91 (2006), p. 615 n.71. See also Jackson, T., “Fresh-Start Policy,” pp. 1403, 1418-24
(citing the inability of utilitarianism to conclusively explain the non-waivability of bankruptcy discharge as
a reason to embrace a contractarian theory of personal bankruptcy).

67 The amount of the filing fee depends upon the Code chapter under which the debtor seeks relief.
Chapter 7: $245, Chapter 13: $235, Chapter 11: $1,167. See 28 U.S.C. § 1930(a)(1) & (3).

68 See 11 U.S.C. §§ 109(h), 521(b)(1), 727(a)(11). For information on approved providers of these
courses, see http://www.justice.gov/ust/eo/bapcpa/ccde/index.htm (last visited July 8, 2019).

69 Using 2007 Consumer Bankruptcy Project data, Angela Littwin finds that, regardless of education
level, pro se Chapter 7 debtors are 10 times more likely to get no relief (i.e., no debt discharge) from
their bankruptcy filings, and pro se Chapter 13 debtors are 45 times more likely to get no relief. Littwin,
Angela, “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System,” in Broke: How Debt
Bankrupts the Middle Class, ed. K. Porter (Stanford University Press, 2012), pp. 163-67. Not
surprisingly, then, the number of debtors filing bankruptcy without an attorney is quite low. Only 3.5% of
the debtors in the 2007 Consumer Bankruptcy Project filed bankruptcy without an attorney. Littwin, A.,
“The Do-It-Yourself Mirage,” p. 158. See also Lupica, Lois “The Consumer Bankruptcy Fee Study: Final
Report,” American Bankruptcy Institute Law Review, 20 (2012), pp. 135, 139 (finding pro se rates of
5.8% in Chapter 7 cases and 2.1% in Chapter 13 cases). All told, then, hiring an attorney and obtaining
a bankruptcy discharge requires an out-of-pocket expenditure averaging from $1,300 (in no-asset
Chapter 7 cases) to $2,900 (in Chapter 13 cases). See Lupica, L., “Consumer Bankruptcy Fee Study,”
pp. 55, 57, 68-69. These are national averages which, of course, obscure significant geographical
disparities. See Lupica, L., “Consumer Bankruptcy Fee Study,” pp. 58-67, 70-79.

70 As Hallinan puts it, “[f]rom the perspective of discharge policy, the relevant point is” simply “the
imposition of costs on the debtor.” Hallinan, C.G., “‘Fresh Start’ Policy,” p. 144.

71 The most visible proponents of this contention were Professor Todd Zywicki and Judge Edith Jones.
See Zywicki, Todd, J. “An Economic Analysis of the Consumer Bankruptcy Crisis,” Northwestern
University Law Review, 99 (2005), pp. 1532-34; Zywicki, Todd J. “Institutions, Incentives, and Consumer
Bankruptcy Reform,” Washington and Lee Law Review, 62 (2005), pp. 1096-1110; Jones, E.H. and
Zywicki, T.J., “It’s Time for Means-Testing,” pp. 215-21. Judge Jones served as a member of the 1997
National Bankruptcy Review Commission, and her dissent from the Commission’s recommendations
served as the template for the subsequently enacted 2005 bankruptcy amendments. See
“Recommendations for Reform of Consumer Bankruptcy Law by Four Dissenting Commissioners,” and
“Additional Dissent to Recommendations for Reform of Consumer Bankruptcy Law Submitted by
Honorable Edith H. Jones and Commissioner James I. Shepard,” in National Bankruptcy Review
Commission, Final Report, Bankruptcy: The Next Twenty Years (National Bankruptcy Review
Commission, Oct. 20, 1997), ch. 5.

72 The bankruptcy discrimination statute is codified at 11 U.S.C. § 525.

73 Perez v. Campbell, 402 U.S. 637 (1971).

74 Reitz v. Mealey, 314 U.S. 33 (1941).

75 Kesler v. Department of Public Safety, Financial Responsibility Division, State of Utah, 369 U.S. 153
(1962).

76 See Brubaker, Ralph “Of State Sovereign Immunity and Prospective Remedies: The Bankruptcy
Discharge as Statutory Ex parte Young Relief,” American Bankruptcy Law Journal, 76 (2002), p. 520;
Brubaker, Ralph “The Bankruptcy Discrimination Statute and Discriminatory Hiring Decisions: Turning
Textualism’s Hierarchy Upside-Down,” Bankruptcy Law Letter, 31(6)(2011), p. 2.

77 Boshkoff, Douglass G. “Private Parties and Bankruptcy-Based Discrimination,” Indiana Law Journal,
62 (1987), p. 163 (quoting Local Loan Co v. Hunt, 292 U.S. 234, 245 (1934)).

78 See Report of the Commission on the Bankruptcy Laws of the United States , H.R. Doc. No. 93-137
(Washington, D.C., U.S. Government Printing Office, 1973), pt. II, pp. 143-45 (proposing § 4-508).

79 H.R. Rep. No. 95-595 (1977), p.165. Thus, the 1978 Bankruptcy Reform Act initially codified only that
portion of the bankruptcy discrimination statute that now appears at 11 U.S.C. § 525(a).

80 S. Rep. No. 95-989 (1978), p. 81; H.R. Rep. No. 95-595 (1977), p.367.

81 S. Rep. No. 98-65 (1983), p. 80. This portion of the bankruptcy discrimination statute is codified at 11
U.S.C. § 525(b).

82 See Brubaker, R., “Discriminatory Hiring Decisions,” pp. 4-6; Brubaker, Ralph “A Race to the
Courthouse (to Beat the Pink Slip): Does Code § 525(b) Prohibit a Pre-Petition Discriminatory
Termination of a Bankruptcy Debtor(-to-Be)?,” Bankruptcy Law Letter, 23(2)( 2003), p. 1.

83 Hurd, Heidi M. and Brubaker, Ralph, The Virtue of Bankruptcy (Oxford University Press,
forthcoming); Hurd, Heidi M., “The Virtue of Consumer Bankruptcy,” in A Debtor World: Interdisciplinary
Perspectives on Debt, eds. R.. Brubaker, R. Lawless and C. Tabb (Oxford University Press, 2012), pp.
317-44.

Auteurs

Ralph Brubaker

Carl L. Vacketta Professor of Law, University of Illinois

Heidi M. Hurd

Ross and Helen Workman Chair in Law and Professor of Philosophy, University of Illinois