Biblical Basis for Bankruptcy Laws
Many people are surprised that the United States Bankruptcy Laws are so strongly grounded in biblical principals. Most would say, if asked about the Bible's view on debt and bankruptcy: "Pay your debts, end of story."
But quite to the contrary, while, of course, the bible does teach that one should pay their debts, it has a strong, countervailing mandate of periodic debt forgiveness. Indeed, in the book of Deuteronomy, the Bible mandates complete forgiveness of all outstanding debts, without exception, every seven years:
"1 At the end of every seven years you must cancel debts. 2 This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD's time for canceling debts has been proclaimed." Deuteronomy 15:1-2.
It was this principal of a debtor's fresh start and the 7 year interval that, in fact, formed the basis for the Supreme Court's modern bankruptcy doctrine. See Local Loan v. Hunt, "[Bankruptcy] gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."
Just a few years ago, however, as a result of massive lobbying by the credit card companies, Congress was convinced to pass a "Bankruptcy Reform Act" in 2005 which had the effect of driving many attorneys out of the practice of Bankruptcy Law and drove down bankruptcy filings by 75%.
This had the unfortunate effect of stopping up a necessary safety valve in the system resulting in the massive buildup of bad debt which many economists argue strongly contributed to the economic meltdown we are seeing today. Dr. Donald Morgan, PhD, a Senior Economist with the US Federal Reserve Bank of New York, has recently completed a study in which he contends that the 2005 restriction of bankruptcy relief bottled up this safety valve and, in so doing, piled up excessive debt, which in turn helped to cause the present financial meltdown. Perhaps the biblical principle of periodic debt forgiveness is, indeed, a healthy and essential component of any free market economic system.
Charging of Interest (Usury)
At the root of the accumulation of debt is the charging of interest at oppressive rates. Mortgage lenders coax people into adjustable rate loans which, when adjusted upward, they can no longer pay. Credit card companies coax people with 0% interest, which later adjusts upward to 28%. Payday lenders charge rates equivalent to over 300% APR. And the list continues.
Hand in hand with the concept of bankruptcy, is also the biblical concept of "usury" or the charging of excessive interest. The Bible stresses that it is a moral wrong to charge a fellow believer interest for a loan. See Leviticus 25:37.
See also, Exodus 22:25 ("If you lend money to any of My people who are poor among you, you shall not be like a money lender to him; you shall not charge him interest.").
This idea, however, has been steadily eroded over the centuries and the "modern" consensus is that the concept of usury is "outdated and antiquated." This gradual erosion was fascinatingly captured in the historical discussion of the word usury by the Webster's Revised Unabridged Dictionary:
"Note: The practice of requiring in repayment of money lent anything more than the amount lent, was formerly thought to be a great moral wrong, and the greater, the more was taken. Now it is not deemed more wrong to take pay for the use of money than for the use of a house, or a horse, or any other property. But the lingering influence of the former opinion, together with the fact that the nature of money makes it easier for the lender to oppress the borrower, has caused nearly all Christian nations to fix by law the rate of compensation for the use of money. Of late years, however, the opinion that money should be borrowed and repaid, or bought and sold, upon whatever terms the parties should agree to, like any other property, has gained ground everywhere."
Coinciding with the timing of the disastrous Bankruptcy Reform Act, came a 2003 decision of the US Supreme Court essentially forbidding states from regulating interest rates through usury laws. See Beneficial National Bank v. Anderson, No. 02-306, 2003 WL 21251449 (June 2, 2003). This "no holds barred" viewpoint on skyrocketing interest rates clearly contributed to the increasingly abusive practices by finance companies against consumers which, in turn, further contributed to the economic meltdown of 2008.
There are consequences to ignoring the sound wisdom that is set forth in the Biblical principals upon which this country was founded.