Distributive Justice vs the Need for Reciprocity

Debt Discharge

According to Zywicki (2000) rampant personal bankruptcy frays the social moral order and undermines reciprocity. Throughout history a debtor who failed to repay a debt was generally regarded as a fraud or a thief; debtors prisons existed for that reason; it was unthinkable that a loan should not be repaid. However, today, personal bankruptcy laws like the federal Bankruptcy Act protect borrowers by providing immunity from creditors. The borrower who defaults will see his credit rating decline to the point where it is nearly impossible for him to get another loan, but he is not held responsible for paying back his creditors. There is a social cost to this, as Zywicki (2000) points out: bankruptcy laws that provide defaulters with immunity undermine the market economy, democracy, and healthy institutions that rely on reciprocity. In short, personal bankruptcy and immunity from prosecution erodes social trust. The ability of a person or institution to repay debts, as agreed upon between the borrower and the lender, “has a salutary effect on social relations” (Zywicki, 2000, p. 8). Without that salutary effect, democracy itself is threatened, according to Zywicki (2000).

Yet, as Miles (1995) argues, the real virtue that holds society together is mercy—not reciprocity. Mercy shown towards individuals who fail to repay their debts is important to social justice. When the less fortunate are visited by hard times, it is a quality of mercy to show leniency towards them and this attitude should be reflected in the law: “If it is necessary for the common good of all to require contribution and sacrifice from the more fortunate to the less fortunate, then the laws must so provide” (Miles, 1995, p. 1034). Thus, while Zywicki (2000) argues that a failure to repay debts undermines trust in society, Miles (1995) contends that a failure to repay debts should not be looked upon as a travesty but rather as an opportunity for those who have to show mercy towards those who have not. This is the essence of what Miles (1995) calls distributive justice, the heart of social justice.

From a social justice perspective, it could thus be said that the federal Bankruptcy Act is fair and appropriate. Rather than hold those accountable who fail to repay debts, it offers such individuals a way to wipe the slate clean. This is known, too, ahead of time by all creditors: there is a risk that a borrower may default, and the creditor assumes that risk when providing the loan. Today, creditors also have the opportunity to offload that risk by selling debts on the open market to investors seeking to collect a yield. Those investors also accept the risk involved. Whether one is buying mortgage-backed securities or Treasuries, the same risk applies: it might so happen that a default occurs. To suggest that bankruptcy protection should be abolished or reformed, as Zywicki (2000) contends, is to lose sight of what Miles (1995) sees as an important element of burnishing social justice in society: the need for forgiveness.