BUS607 Assignment Week 4 Ethical Consideration of Creditors’ Rights and Bankruptcy

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BUS 607 Business Law for the Accountant

Instructor: Janet Fiorentino

UAGC

21/8/2022

Ethical consideration of creditors' rights and Bankruptcy

Bankruptcy law favoring debtors

Bankruptcy law is meant to transfer assets from creditors to debtors. It involves restructuring the debtor’s property and assets to liquidate them and eventually distribute the proceeds among creditors. It is a process that can be applied under certain circumstances for debtors to have the opportunity to regain their assets in a new environment and start over.

Bankruptcy law favors debtors in the following ways: The first and perhaps most obvious is that debtors in a bankruptcy case are granted a discharge from their debts. This means the debts can be wiped off the slate for five years.

It allows debtors to keep intact the property that belongs to others. This means that the debtor can even save other people’s property that is not theirs. The law allows the debtor to keep the house intact, that is, to keep it from being divided into assets earmarked for creditors. Instead, it will be divided according to the debts of the debtor. This is why we see bankruptcy trustees distributing assets as though they had been given them rather than receiving them in trust from the creditors (Warren,2017). They are supposed to distribute everything according to each creditor’s debts and nothing else.

Debtors are also allowed to change residence or job without permission or notice, something a creditor would be hard­pressed to do without the bankruptcy judge’s permission. Another example is that debtors are allowed to get loans while in Bankruptcy; a creditor, however, would almost certainly be counseled by their attorney not to take on new loans.

Debtors can also avoid taking ownership of personal property that might otherwise be used as collateral for a loan (for example, the debtor would not want to take ownership of their car, which could be repossessed), which would nullify their ability to seek more loans. They are also given priority on the distribution of money coming out of Bankruptcy; they receive the total value of their assets immediately preceding the filing date (perhaps in dollars, perhaps in installments), and any interest due is either returned at that time or paid out as part of the distribution (depending on whether it is likely to cause any problems).

Creditors often do not receive the bankruptcy court’s approval to be paid, which means they are not always paid on time by the trustee. In addition, they may receive no interest on the amount they are owed, and some creditors may even be barred from receiving anything.

Revision to Bankruptcy law

Bankruptcy law protects the interests of debtors, ensuring that most of what they have left is not taken away. However, in recent years, we see more and more people filing for Bankruptcy as a way out. This is unfair to creditors, who receive only small returns on their loans or investments.

A revision to Bankruptcy law should ensure that debtors are required to hand over most of what they have, but not all of it. Similar adjustments should be made to how individual files for Bankruptcy. This would ensure that Bankruptcy, which is meant to protect the interests of debtors, is carried out in the fairest way possible. To achieve this, a revision to Bankruptcy law must first ensure a fundamental distinction between ‘disposable’ and ‘non­disposable’ assets. Only the latter can be taken from debtors' belongings, whereas they can essentially keep the former.

Next, a revision to the Bankruptcy law must clarify that debtors must hand over all they have if they file for Bankruptcy. This means they cannot keep any property if they face financial difficulties. This prevents people from unfairly having their suitcase full of money replaced with only crumpled notes and a jacket or two. This would be fair to creditors who have their money taken away if someone files for Bankruptcy.

Finally, a revision to Bankruptcy law must also ensure that an individual filing for Bankruptcy is responsible for any costs accrued during this time (Warren,2017). If the debtor does not pay these, the creditor should pay them instead of bankrupted debtors. This ensures that similarly situated creditors dealing with relatively similar debtors are treated equally and fairly. All in all, a revision to Bankruptcy law is needed to provide a better balance between the respective interests of creditors and debtors when it comes to bankruptcy laws.

Creditor self­help provision

The creditor self­help provision of the UCC’s Article 9 is not ethical. This provision allows a creditor to use a self­help remedy to recover the value of collateral or protect the interest in collateral from being impaired by an act of a party in interest. The creditor must obtain a court order before taking any self­help remedies to enforce its rights against parties not in default under the credit agreement; however, there have been many instances where creditors have taken self­help without obtaining legal judgments.

The UCC’s Article 9 contains many provisions that allow for balanced and reasoned handling of debt and collections matters. Still, it is important to note that these provisions can also be used as loopholes where creditors can exploit vulnerable people. A creditor’s self­help remedy, as permitted by Article 9, is:

1.      Actual possession of the collateral.

2.      [Pursuing] a judicial proceeding to obtain title to the collateral.

3.      Exercise of a security interest against goods that the secured party has in its possession.

4.      Exercising remedies for conversion or replevin concerning inventory that a secured party possesses.

The first self­help remedy allowed is actual possession of the collateral. This is used when the creditor has a dominant security interest in collateral, and the debtor does not put up an objection to payment from proceeds from the sale.

The second self­help remedy is [pursuing] a judicial proceeding to obtain title to the collateral. In this case, the creditor must first get a judicial order to take possession of the collateral. The UCC requires the creditor to post security before obtaining a possessory lien.

The third self­help remedy is exercising remedies for conversion or replevin concerning inventory that a secured party possesses. In this case, the parties go through legal proceedings, and courts decide whether the goods are subject to replevin or conversion.

The final self­help remedy allowed under Article 9 is using remedies for conversion or replevin concerning inventory that a secured party possesses. If these remedies fail, the creditor can use other remedial measures to convert collateral into cash without court involvement.

They can be used as loopholes because creditors can easily manipulate the law for their benefit (Bulow,2018). An example would be a creditor coercing the debtor to sign a nonmonetary default or pressuring the debtor to waive any judicial remedies.

For creditors to take self­help remedies, they must obtain a court order before taking such actions. Many courts have allowed creditors to use such self­help remedies without having a court order, which has led many people to argue that these actions taken by creditors can be considered unethical.

Avoiding paying debts

To avoid paying one’s debts by going into Bankruptcy is considered unethical according to the ethics of reciprocity. The ethical principle of reciprocity is “the idea that if you want something from others, you should be willing to offer something in return.” When we go into Bankruptcy, we are not giving anything back; therefore, this would be considered unethical and unfair for those who were left with the debt. To avoid paying one’s debts by going into Bankruptcy is regarded as unjust due to its effects on society (Bulow,2018). The products of the culture of avoiding paying one’s debts are that the economy will suffer because the people spending money are now avoiding paying back. This would cause a decrease in the country’s Gross Domestic Product (GDP). Also, the government will lose tax revenues due to reduced consumption, investment, and employment. This can lead to tax increases or higher government deficits. Another effect is that the creditor’s incentives will be affected. The creditors will have to pay higher interest rates when loaning the debtor. This would increase their losses, and they could consider quitting the business.

Negative consequences of bankruptcy discharge

The negative consequences to a debtor whose debts are discharged in Bankruptcy include the following: It can create a bad impression if he/she is looking for a loan from someone in the future since banks typically do not lend money to someone who might declare Bankruptcy in the future (Rendleman,2019). Loaners may be put in a tough spot, where he/she has to repeatedly tell the story that he/she cannot pay back the money due over time. This will become very stressful for the debtor.

The court will also close many lines of credit, such as bank cards and store accounts, making it difficult (or impossible) to buy things on credit later. It may be difficult to secure a new credit card or a store account, particularly if one has had financial difficulties. Having lines of credit closed may affect long­term planning and planning for retirement.

Securing a job may be difficult because most employers have access to credit reports on individuals applying for jobs. If an employer finds that you have a discharged debt in your credit report, the employer may believe you are not trustworthy and will be more hesitant to hire you. In addition, a discharged debt remains on your credit report for ten years. During these ten years, you cannot declare Bankruptcy again (unless it is as a chapter 7 debtor). The longer period will make it difficult to go through Bankruptcy again if problems with finances occur in that time frame and the individual becomes insolvent.

Better off or not

If someone is in this situation and has had their debts discharged in Bankruptcy, it can be a very long time before they can get back on their feet again. Getting a fresh start after having debts discharged in Bankruptcy can be very difficult for those who cannot access credit due to being considered too risky. Some people never realize that they have been debt free and will continue paying on the debt they incurred while they were bankrupt.

           Few people realize that their credit rating will be significantly damaged by having debts discharged in Bankruptcy (Rendleman,2019). Their debt may not have gone up, but the negative impact on their credit rating is so severe that it takes a long time for them to rebuild their score. Most people who take out loans and incur debts are competent individuals making decisions they know are right for them. If a person has a good credit history and has debts discharged in Bankruptcy, they will usually be able to access credit when they need it again. However, if they have had their debts discharged in Bankruptcy, it can take a long time to rebuild their credit rating, and once it has been established, it can be very difficult for them to access credit, even if their circumstances change. All in all, debtors are not better off after their debts get discharged in

Bankruptcy.

Accountants’ duty

The duty of accountants to their clients concerning incurring debt and dealing with creditors includes the following:

•       Accountants should ensure that the client has a thorough understanding of the implications of his or her financial commitments and what is required of him or her to meet these commitments. Accountants must ensure that the client maintains a realistic perspective on his or her finances.

•       Accountants should attempt to guide their clients through difficult financial situations to avoid potential insolvency, insolvent liquidation, or Bankruptcy.

•       In such cases, accountants may seek the advice and assistance of legal counsel if it seems necessary for their client’s protection and well­being.

•       Accountants must endeavor to provide their clients with financial information that will help them make informed decisions regarding the financial needs of the client.

•       Accountants have to disclose adverse information that they learn from all appropriate sources, including from the client, other accountants, or other parties performing services for the client) in order to protect their clients and prevent potential losses in circumstances where there is a likelihood that such information might be of use to those parties who want to take advantage of the client.

References

Warren, E. (2017). Bankruptcy policy. The University of Chicago Law Review, 54(3), 775­814.

Bulow, J. I., & Shoven, J. B. (2018). The bankruptcy decision. The Bell Journal of Economics,

437­456.

Rendleman, D. (2019). The Bankruptcy Discharge: Toward a Fresher Start. NCL Rev., 58, 723.