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How Bankruptcy Remedies the Economic System

We often hear people say that filing bankruptcy is “unethical” or “wrong” and that it isn’t good for society.  From a macroeconomic viewpoint, however, bankruptcy filings are good for the economy.  When a person files for bankruptcy, it frees up that person’s monetary flow. Without the bankruptcy system, debtors would remain unable to pay debts, and creditors would keep pounding away to get their money.  Consumers who are burdened with debt obligations are unable to consume new goods and services and are essentially non-productive economically.  From the creditor’s perspective, instead of focusing on new customers and generating income, the business focus would become stuck on massive debt collection efforts that are not usually the most profitable way to invest time and energy. Stuck debt decreases consumer spending.

The fact is that bankruptcy brings closure to a debt situation, for the debtor and creditor alike. Once a bankruptcy case closes, the creditor can get on with business and the debtor obtains a fresh start and can begin spending again. Production and consumer spending are healthy for the economy. According to a Bloomberg April 2012 article, consumer spending accounts for 70 percent of the United States Gross Divisional Product (GDP).

An MSN Money article entitled What If the U.S. Declared Bankruptcy? points out that the real problem with the U.S. economy is debt. American households owe $13.3 trillion in debt, a figure that doubled in the past 11 years. Spending money is freed up when debt is wiped out. The consumer starts eating in restaurants again, going on vacations, and buying furniture or appliances. And companies working in these industries hire more employees to keep up with production demand. The author MSN quoted, Bret Arends at MarketWatch, points out that when large failing companies file Chapter 11, creditors usually get paid equity. Although they lose the interest amounts, everyone gets back to business.

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