This column is about bankruptcy — financial, not moral. The former is a matter of math and objective law. The latter is subjective judgment.
In the 1950s my dad was a residential building contractor. To this day I can show you homes around west-central Pinellas County, Florida, that he built and which are still being used as residences, including the one I grew up in.
But in 1957, there was a recession which was particularly devastating to the Florida home building sector, that resulted in his business bankruptcy. As a child I didn’t really know what it meant, other than that for the next couple of years Dad was working as a plumber for someone else.
In 1961, Dad took the few thousand dollars he inherited from his mother and started his own plumbing business. He converted his 1952 black Buick sedan into a hand-made pick-up truck, using yellow-pine for the truck bed that he painted bright yellow. During summer vacations from school, I would often go to work with him on residential job sites, where I learned the basics of his trade — though most of what I learned has been replaced with modern materials and technology.
His first business office was in a corner of our home dining room, and our home phone doubled as his business line. Beginning at the age of 12, I learned to take business messages for him, until he became successful enough to get an office and secretary.
As his company succeeded and expanded over the next 35 years, he retained that original black and yellow color scheme for the company logo. Somewhere in a box in the back of a closet, I have a decades-old black t-shirt emblazoned with the yellow company name.
By the time Dad retired in his mid-70s, that one-man plumbing business begun in a home-made pick-up truck and our dining room table had expanded to be one of the premier plumbing/heating/air conditioning and mechanical contracting businesses in the area, with many employees, multiple vehicles, and a nearly one acre office/shop facility. His company worked on the largest commercial and government projects in our county.
Dad’s ability to expand from that humble beginning was facilitated by commercial business loans from banks who trusted him. His was able to secure the first loans because going through bankruptcy enabled him to have a “fresh start”.
For a couple of years in the late 1970s I worked for a man who was the very essence of an entrepreneur. A lawyer by training, he didn’t practice law anymore, choosing instead to start new businesses. Some succeeded — others failed, resulting in bankruptcy.
I asked him once how he felt about going bankrupt. I still recall his reply “That’s just the cost of doing business. Sometimes you succeed, sometimes it doesn’t work out. So you move on. What’s important is to keep trying to build something!”
He did keep trying. A couple years after I left his employ, he started yet another venture you may have heard of — it’s called the Home Shopping Network. Getting out from under bad debt, through bankruptcy made his overall success possible.
In law school, I took an elective class on bankruptcy. I needed a couple hours of credit, and figured I might learn something that could be useful some day. Fortunately I’ve never needed it, and now retain very little of what I learned in that class. The one thing I have retained is the reason, both legal and philosophical, for bankruptcy laws.
The United States Constitution expressly empowers Congress to “… establish … uniform Laws on the subject of Bankruptcies …” (Art I, Sec 8, c4). The legal idea is to provide a nationwide standard for dealing with bad debts, thus facilitating commerce — replacing disparate State laws.
Despite being mandated in the original federal constitution, the current federal bankruptcy statute was not enacted until 1898. Except for two earlier short-duration federal statutes that were quickly repealed, bankruptcy had always been the subject of State laws
Some State bankruptcy laws exploited farmers and small businesses in favor of big lenders, while others screwed over lenders by relieving debtors from what they lawfully owed. (See Lawrence Friedman, A History of American Law ) The ‘National Bankruptcy Act’ of 1898 brought order to the chaos. That ‘Act’, with a few modifications, is still the law of bankruptcy today.
Historically, under Anglo-Saxon common law, bankruptcy was often treated in society as a moral rather than business issue. Debtors could be bound into serf-like servitude to creditors, or even sent to debtor’s prison. Being “a bankrupt” was seen as a moral “failure of character”, rather than what was often a result of business circumstances beyond an individual’s control.
In the context of more recent history, think of the family business bankruptcies that resulted from (what we now know to be) ridiculous, unnecessary, government-mandated COVID shutdowns. Does anyone consider those business owners to be failing in moral character ?
The point I’m making with all this about my Dad, the entrepreneur I worked for, and anyone else who may resort to bankruptcy is that doing so is intended to afford — and often does afford —another chance to succeed. It facilitates the entrepreneurial spirit that built the most successful economic system in human history. That is the ideal behind our bankruptcy laws.
So I’m always amused when someone says to me that Donald Trump is unqualified to be President because he has had businesses go bankrupt. My response is, “Trump has used bankruptcy laws. So what? That’s what those laws are intended for. He’s had far more successes than failures. All he has done is utilize the law as it was intended . Which proves he’s smart.”
Nor do those who disparage Trump’s bankruptcies seem to have any clue that, at this particular time in the nation’s economic history, having a President who understands how bankruptcy helps in the long run is exactly what we need. Because …. the United States government is bankrupt.
That will be the subject of Part Two, tomorrow,,,