Like the perfume seller in Balzac's Human Comedy, many people still fear the moral stigma of bankruptcy. But while modern bankruptcy laws allow people to walk away from their debts, they do not address the underlying issues that can all too easily leave hardworking people in dire financial straits. Jack Ayer, emeritus professor and former bankruptcy judge, recommends his top bankruptcy books.
Isn’t bankruptcy quite a new thing? If you read Charles Dickens, people often seem to end up in debtors’ prisons, suggesting bankruptcy wasn’t an option in Victorian times.
The short answer is no, it’s not a new thing. But we need to clarify what we mean by bankruptcy. In my lifetime—in the USA at least—most people think of bankruptcy as a device where you file a piece of paper at the courthouse and get a piece of paper that wipes out your debts: the ‘discharge.’ It’s never been quite that simple, but it certainly is true that most people who file for bankruptcy come in search of the discharge, and most get it.
In earlier times, you wouldn’t have viewed it that way at all. It would have been better then to think of bankruptcy as a collection device, where the creditors clubbed together and picked the debtor up by the heels and shook him to see what rolled out of his pockets. The debtor was no more eager to initiate a bankruptcy than you or I would be to initiate a root canal: it might be the least worst alternative but it was certainly going to hurt. It’s here, for what it is worth, that bankruptcy veers over into the criminal law. I believe that in some countries the term still denotes a crime today. In the US we have a statute in the code called ‘bankruptcy fraud,’ which is about using the bankruptcy statute to perpetrate a fraud, but there’s nothing making bankruptcy a crime per se.
“Bankruptcy is not really a thing, it’s a symptom”
If you see bankruptcy as a creditor’s remedy, you can understand the history of the word. There’s a founding legend—I’m not sure I believe it—that it comes from the Italian, ‘banca rotta’ which means a ‘broken bench.’ The theory is that if the debtor couldn’t pay his debts, you destroyed his trading place. It was only later that creditors began to realize that sometimes you could get more out of the debtor by encouraging his cooperation. So: if you fight and resist us, we hang you. If you work with us and try to maximize our return, then maybe, just maybe, we will let you off the hook for the balance. Out of this seed the general discharge slowly emerged.
We also now use bankruptcy as a kind of ‘civil parole.’ The court administers a program under which individual debtors pay off part or all their debts over time. Those unsympathetic with this scheme think it looks suspiciously like peonage or indentured servitude, but I think that’s a stretch: as a whole, I suspect debtors get more relief out of it than creditors.
In a wholly different dimension, there’s business or corporate bankruptcy, where debtors deploy the courts as a framework in which to “readjust” (heh!) their debts. Businesses have probably always done this. In the past, white-shoe lawyers didn’t like to think of themselves as doing bankruptcy, but in my lifetime they’ve come to recognize that bankruptcy may be just corporate finance with negative signs.
Lately we’ve also begun to discover that the bankruptcy court is a pretty good forum for untangling complex multiparty conflicts that go beyond mere money. The debacle around the Catholic Church sex abuse cases is perhaps the most conspicuous example. You have some of that same flavor in cases where the whole city files for bankruptcy or the recent filing where PG&E (my gas and electric provider) resorted to the bankruptcy court as it confronted the near-astronomic liabilities from the great Paradise forest fire (just uphill from me).
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Lastly, I should mention that the question of how you discharge debts in bankruptcy is entangled through modern history with the question of limited liability for business debtors, like in corporations. That goes back to the time of the great merchant-adventurers in the 16th and 17th century, where moneymen in London might put up some capital and adventurers would sail out to the Antipodes and spend the money trying to make things happen. If it all went pear-shaped the investors would not get their money back, but they weren’t answerable for anything else the adventurers did on the ground. That’s the root of the idea of the limited liability corporation as it emerges in the United States. The development of the LLC and the development of bankruptcy law as a mechanism for discharge seem to go hand in hand.
In short, bankruptcy is not really a thing, it’s a symptom. It’s a loosely related gaggle of concepts that share in common the principle that they all have something to do with debt. You can identify a bankruptcy element in all five of the books I’m recommending here, but it’s always part of a larger story.
Has that always been an aspect of bankruptcy or is it more the case now than it was in the past?
One of my favourite professors—although he wasn’t actually my professor—was a commercial law teacher who used to say, ‘We live, as always, in an age of transition.’ These ideas do evolve and change.
The United States Constitution actually reposes in Congress the power to make laws regulating bankruptcy. There is no legislative record on exactly what the drafters had in mind, when they put that language in there.
What do you think it was about?
I can’t tell. It’s possible they wanted to make sure there was a way to make a collective proceeding, a punitive device for catching up with debtors and extracting wealth from them, or punishing them. It’s possible, also, that it was done by people who wanted a device whereby if they got in trouble they could go to court and get a piece of paper that allowed them to wipe out their debts. It might have been both at once. We really don’t know.
Basically, bankruptcy is absolutely crucial to the way capitalist economies grew?
Maybe and maybe not. Marx would say it’s an index of the fact that capitalism is inherently unstable. But we’ll get into that more with the Graeber book.
Yes, so let’s start by talking about that one. So it’s by David Graeber and it’s called Debt: The First 5000 Years. How is this book important to a discussion of bankruptcy?
Recall that bankruptcy is one piece in a larger mosaic. Bankruptcy is about debt, debt collection and debt forgiveness. Graeber touches on all these topics—he tries to paint them into a big and unified picture. His takeaway finding is that debt abides, that debt issues transcend mere bankruptcy and even transcend capitalism. Seen in this broader context, we come to understand how not merely is bankruptcy an aspect of debt, but debt is an aspect of sovereignty itself.
Consider how many societies, throughout human history, consist of, one, a tightly knit core of oligarchs, and, two, a much larger mass of the faceless and voiceless. The oligarchs ‘own’ and the voiceless ‘owe.’ In an all too common version, those who owe just get further and further behind until they have two choices: suicide or slavery. You get a version of this world in the account of Sólōn, the pre-Classical Greek lawgiver said to have ended debt slavery in Athens. You get echoes of it in the Biblical discussion of debt relief through the institution of the jubilee.
Graeber’s book seems to generate fierce partisanship among its critics and its defenders. They’re both right: it does have its shortcomings but he gets some big things right. I suspect a virtue but also a defect is that he was trained as an anthropologist in a field dominated by economists. He probably sets out to prove too much, and gets out of his depth. But I don’t know of any other author, ancient or modern, who tried to tackle debt as a whole.
Let’s talk about the Honoré de Balzac novel next. It’s part of his La Comédie Humaine (The Human Comedy) and it’s about a perfume seller called César Birotteau.
I have a friend in his 80s who has included on his bucket list the goal of reading all of Balzac. I have not (and do not plan to) read all of Balzac. But it’s a worthy objective, particularly if you want to understand what Marx would have called “bourgeois capitalism.” There are a lot of Balzac novels but César Birotteau is the only one I know of that directly addresses our topic. Birotteau is everything you might want in a bourgeois hero: vain and puffed up and almost absurdly proud of his success in the perfume game. Then he gets swept up in what we can call ‘the speculative mania.’ Balzac seems to appreciate him with a kind of wry but affectionate irony. I have known bankruptcy lawyers who think of their clients in pretty much the same way.
Early in the novel, César seems to think people who don’t pay their debts are the scum of the earth, but he then ends up in bankruptcy court himself.
Birotteau did indeed hold bankrupts in contempt, until he became one himself. Ι think it is part of Balzac’s greatness that he recognized and knew how to convey the all-too-human ambivalence—even schizophrenia—about the process and its place.
Balzac touches on another theme that comes up in a few of the books you’ve chosen, that we’re all quite close to bankruptcy: a few miscalculations, a few things not going quite as planned. It’s not too hard to end up in a mess.
Indeed. And I think these various points help us to understand why Marx thought so highly of Balzac—and why both Marx and Balzac might have countenanced César Birotteau with a mixture of compassion and amused contempt.
What are the bankruptcy rates at present?
US bankruptcy filings ran a bit under 800,000 cases in the most recent reported year. That’s a bit under half the peak, which was achieved back in 2010. An interesting question is how far that decline bespeaks a better economy, how much it’s about debtors with problems so severe that bankruptcy can’t help, or cases where debtors and creditors agree that it is more cost effective to cut a deal outside of bankruptcy than to submit to the rigours of the process itself.
Tell me about the next book on your list. It’s by Greta Krippner and it’s called Capitalizing on Crisis.
I’ve read a good many books about our recent financial market afflictions, many of them quite good, some excellent. But there’s an awful lot of overlap. Most build at least in part on the same story line: a cabal of libertarian ideologues deployed a washed-up second string actor in the service of an ideological agenda.
Krippner is one who tells a different and in itself arresting story. I discovered this book just lately and I’ve learned a lot from it. She is trained as a sociologist and she sees things through a different lens.
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Krippner argues that the standard narrative, while not entirely wrong, is misleading and vastly oversimplified. For starters, she points out, the great wave of deregulation, seen as the heart of our problem, can be understood not so much as a purposive story arc as a series of ad hoc decisions designed, first of all, to kick the can down the road. ‘Let the market decide’ often meant little more than ‘we really haven’t any idea what to do about it.’
We also visualized ‘let the market decide’ vaguely as freeing up the world for a whole new smorgasbord of invention and production. It didn’t, really. Rather, most of the can-kicking decisions generated what Krippner calls ‘financialization’—a world in which the techniques for raising or investing money become more important than the nominal product. It’s a world where you can without distortion think of a company like Toyota or General Electric as a “bank.” With a proliferation of debt, it’s no surprise that you also find a proliferation of non-payment.
Let’s talk about the book Elizabeth Warren wrote with her daughter, Amelia Warren Tyagi next. It’s called The Two-Income Trap: Why Middle-Class Parents are Going Broke.
Elizabeth is, of course, at this moment, a candidate for the US presidency. Before she emerged in the political arena, she had a previous incarnation as a professor of bankruptcy law, in which guise she played a pivotal role in reinventing the agenda for bankruptcy scholarship. Specifically, she (with others) made it worthwhile and important to try to figure out just who filed for bankruptcy and why. In particular, there was (and perhaps always has been) a view that bankruptcy was mainly the result of debtor irresponsibility. Elizabeth made it her business to demonstrate that this account is bollocks: that most individual bankruptcies can be traced to structural failures for which individual debtors should not be held responsible. It’s a complicated proposition and it is possible to have reservations about some of her work while still recognizing that she has greatly changed the pattern of thinking about the issues (and has the right enemies…)
The book, which is based on families who filed for bankruptcy in 2001, makes quite scary reading. They note that these are people who “went to college, had kids, bought a home, played by the rules—and lost.” Also, this is even before the financial crisis.
Yes, if you mean the crisis of 2007-2008. That wasn’t even the first crisis. We’d already lived through other financial crises, not least the so-called savings and loan crisis of the 1980s, which spread like a prairie wildfire across the housing industry in its own time. The Warren-Tyagi book helps us to understand that the chain of events beginning in 2007 exposed systematic flaws that been growing more untenable for years.
So do you agree with the authors about ‘the myth of the immoral debtor’?
Do I agree that bankruptcy is not driven by the immoral debtor? Yes, it’s not. Certainly there are irresponsible debtors and some of them get away with stuff through the bankruptcy system. But they aren’t the heart of the problem. It’s more and more about debtors trying to maintain a secure and steady family life. That’s what Warren and Tyagi’s book argues and the mass of data supports them.
“In particular, there was…a view that bankruptcy was mainly the result of debtor irresponsibility. Elizabeth [Warren] made it her business to demonstrate that this account is bollocks: that most individual bankruptcies can be traced to structural failures for which individual debtors should not be held responsible”
Did you know Elizabeth Warren through your bankruptcy work?
I was never an intimate friend of Elizabeth’s, but I was an amiable professional colleague back in her academic life. We lunched out together a couple of times, she had the fruit box. For a short time, I had an office catty-corner across the hall. I remember overhearing her talking loudly and cheerfully into the telephone. She had her feet on the desk. I don’t think I’ve ever laid eyes on any of the other authors, but if there is an afterlife, I hope I get to do lunch with Balzac.
Lastly, you’ve chosen Jennifer Taub’s Other People’s Houses. I found this book very readable.
Yes, it is. Superficially, this book might appear to be a clone of Warren and Tiyagi’s book—a drab technical story told with dramatic force by an author unsympathetic to high finance, now morphing into a political player. It isn’t, really. For one reason, it concentrates on real estate, particularly the residential housing market. Also, I don’t know of any book that does a better job of drawing the personal and the institutional together in the ritualized craziness of modern real estate finance. She interweaves the macro and micro—and explains the abstract financial structure while showing its effect on real people.
She homes in on the 1993 Supreme Court decision that prevents home mortgage modification through bankruptcy as a real problem. Is that still an issue?
Yes, but I don’t think it’s quite fair to say the decision prevents modification, as if to suggest it’s the court’s fault. It’s better to say the court was telling us what the legislatures meant when they wrote the statute. And note the decision was nine-zip. And if they’d asked me it would have been ten-zip. This was what the drafters of the relevant statutes intended. Could the drafters have written differently? Sure. Could they change the statutes now? Sure, but when you get into the weeds, you realize it’s not that easy to figure out exactly what kind of rewrite makes sense.
In general, would you say the bankruptcy system has been harder on debtors than it has on creditors?
In general, I guess I would although I might not frame it quite that way. Recall that bankruptcy is part of a larger system. If I were sovereign, I might monkey around with the bankruptcy system, but even as to debtors and creditors, there are other things I’d do first. I’d much rather work for ways to change the system such that so many insane deals just don’t happen to begin with. I don’t see any good reason for a system wherein 26 people together own as much wealth as the bottom half of the world population. I’d love a world where just about any adult can make a living such that s/he can support a family. I’d love to build a system that exists for some purpose other than the enrichment of bankers. Then I’ll worry about ‘overreaching creditors’ and ‘irresponsible debtors’ and I think that problem will be manageably small.
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