Nate

What are the responsibilities of an insolvent debtor to his/her creditors?

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Here are some questions I've been grappling with for a while, but have been unable to identify principles with which to answer:

In a situation where one has far more debts than he or she can service, what are the responsibilities of a debtor to his or her creditors? Is it moral to prioritize creditors who are willing to accept substantially less than the full amount owed? How does one decide things like how much to spend or how much to keep aside for emergencies? If self-employed, how does one decide how much money to use for the growth and operation of a business?

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Here are some questions I've been grappling with for a while, but have been unable to identify principles with which to answer:

In a situation where one has far more debts than he or she can service, what are the responsibilities of a debtor to his or her creditors? Is it moral to prioritize creditors who are willing to accept substantially less than the full amount owed? How does one decide things like how much to spend or how much to keep aside for emergencies? If self-employed, how does one decide how much money to use for the growth and operation of a business?

1. To pay back the debt as quickly as possible.

2. Of course.

3 & 4. In the same manner as one would in any situation, whether one was in debt or not. The debt simply limits how much money is available.

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I'm afraid I don't understand at all what it is you are telling me.

"1. To pay back the debt as quickly as possible" seems to contradict "3 & 4. In the same manner as one would in any situation, whether one was in debt or not," and I have no idea what "The debt simply limits how much money is available" means.

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If every action has some risk and so does loaning money. It the borrower can't pay it back then he can't pay and that is a fact of reality. If there is no fraud involved so there is no crime, then the situation is dealt with as objectively as possible under bankruptcy law. Before it reaches that stage, the debtor can try to come up with voluntary arrangements for delayed or partial payments. If at a later time the borrower can afford it, he may continue to repay even though the law does not require it.

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Pay back the debt as quickly as possible while minimizing your losses. If you fail to make the creditors happy they can take legal action where the priorities are made according to law.

I'd like to flip the coin a little bit here. A while ago I was discussion my issues with debt sanitation laws (similar to personal bankruptcy law in the US) with a collegue (I work in debt enforcement). I find it unfair that the creditors can lose their right to enforce the debts, However, she made good point that I find difficult to answer. What about the creditors responsibilities? Would it be responsible to borrow money to someone who runs a high risk of defaulting on the loan? By accepting that risk, would it be unfair if the creditor lost the money?

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Would it be responsible to borrow money to someone who runs a high risk of defaulting on the loan? By accepting that risk, would it be unfair if the creditor lost the money?

If, all things considered, the loan offer has a positive expectation when measured against alternatives, then making the offer is a perfectly reasonable thing to do.

Is your colleague implying that lenders are somehow responsible for the financial decisions of their clients? Have you inquired as to what your colleague thinks makes a loan offer responsible?

It is unfair if the creditor lost money only if the debtor is dishonest. It is more unfair if the creditor has been deprived of just recourse.

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I'm not sure about the specifics on my colleagues position (I was just trying to challenge her to see how she would respond).

Part of the risk the creditor takes that the debtor may never be able to pay back. So the creditor takes a calculated risk, which may or may not have been reckless. When it backfires, should the creditor be able to bind the debtor to the contract for the rest of the debtors life? Analogies can be made to regular contract law where in many legal systems binding someone to a contract for a liftetime is not allowed (in swedish contract law such terms could probably be adjusted for being unreasonable).

I must add that so far i'm undecided on the issue. I haven't finished thinking about it yet.

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