1. Money

How Bankruptcy Works – Europe vs the US

Last Updated on August 23, 2020

Bankruptcy laws were not made to allow some people to rob or cheat other people.

It may seem that way to those who are indeed left empty-handed when someone you trusted with your money or labor is legally released from their debt to you.

How can this happen?

In some places, like Switzerland, when a private banker cannot meet his obligations, he can’t go bankrupt. Not only that, but he may also be criminally liable and go to jail – even if there was no fraud.

In Europe, bankruptcy is much more of a disgrace. Anyone who has failed to meet their obligations for any reason is usually ruined for life and unable to start again.

This is not true in the USA.

In the USA, the creditor class (usually bankers moneylenders and other rich people) were deemed less worthy of legal protection than workers, contractors, builders, etc.

Those who owed money and could not pay were given protection by USA bankruptcy laws. Bankruptcy was and still is an easy way for individuals or corporate debtors to escape from obligations they could never hope to meet.

Typically, the USA debtor could keep “40 acres and a mule” and start again. The main exceptions never forgiven, were tax debts, alimony, and child support.

Fraud is also, not forgivable. Many if not most bankruptcies used to be caused by the vagaries of the weather or the business cycle.

Farmers were wiped out because of droughts – no rain. Contractors could not pay their workers or the moneylenders because of a financial crash on Wall Street. A catastrophe not of their own making wiped out their capacity to repay.

European style laws would have ended a businessman’s productivity forever after bankruptcy.

USA style laws, in contrast, allowed for an orderly liquidation of assets and a fair distribution to creditors. After a short waiting period, the debtor is free to start over.

The fact is, most entrepreneurs who have contributed mightily to the economy have been down and out at least once.

Bankruptcy in the USA is and was always considered a shield for worthy individuals, not a sword to be used by the unethical. It is also the standard way for corporations to commit “legal suicide.”