Is Burning Creditors In A Workout A Moral Thing To Do?
Is burning creditors in a workout situation a moral thing to do?
Creditors are not forced to accept unsecured debt, thus they knowingly and willingly accept the risk of loss and build bad debt into their profit equation and break-even analysis. In other words, bad debt is part of the cost of doing business. Creditors acknowledge and are willing to accept a percentage of bad debt in order to reach their sales objectives and profitability requirements.
I always presume, and it is most always true, that the debtor is not driving a Porsche, has not stacked gold under his bed, and has no offshore accounts. Most always he is totally invested, capped out on credit cards, has borrowed all he can from friends and family, has not taken a paycheck in a while and believes that all will turn around soon.
The creditors work with the debtor knowing the risk is high, but the greed factor wins out and debt is allowed to build. Both sides knowingly allow debt to build, and thus both sides accept the risk. So, if debt write-off is a part of every business equation, risk is accepted knowingly and the debtor is not gaining personally while everyone else is betting on his business success and losing, then we do not have a moral issue here whatsoever. We have a typical business situation within which all get to make the best decisions for their business.
Debt forgiveness in exchange for some payment is a valid and reasonable business decision and not a moral issue. If there is no payment, it is simply a fact of business reality. Some debt will never be paid. Both sides will agree only if there are adequate benefits for each side, or reality controls and there is no payment at all. It’s a business decision, pure and simple. It is a business deal where each party wins, and no one is forced to make a decision or to participate at all. There can be no immorality in such an agreement.
Thus, when I negotiate workouts that sometimes eliminate all the unsecured debt, and pay partially on the secured liability, business can be done again with the “losing” vendors. Lines of communication are damaged, but relationships can remain adequately good to restart a new enterprise with the same people doing the same things. It happens all the time because it is not a moral issue that will offend associated businesses. It is a business reality and an understood aspect of risk management. When reorganization and elimination of unsecured and even secured debt is the solution, it is a reasonable strategy that has nothing to do with your good reputation or what people will think of you. It is merely a reflection of a business reality that we all have experienced in one way or another.
It is true that many believe quite the opposite, that as a matter of honor, one must pay back all unsecured or secured debt. Some argue that a debt is a debt and one’s word is his bond, unbreakable. Therefore, a debt workout is immoral, unjust and simply wrong. That’s the opposite view that I see and hear over and over. I acknowledge the power of these commitments and cannot entirely discount their validity. It can be said that a man’s value is measured by his commitment to his word. But a debt is not a one-sided equation.
Which view is correct? Probably both–it’s a personal decision. However, I alert my clients to the reasonableness and appropriateness of a debt workout and allow them to make their own decisions. There is always another way to reach the goal. In the end, if two business people make an arrangement to work out a debt for less than what is owed, how can it be considered anything other than an appropriate conclusion? A workout is a deal that has been struck between two parties to the benefit of both and thus cannot be immoral.
