Ethical Considerations in Filing Personal Bankruptcy: A Hypothetical Case Study

Journal of Legal Studies EducationVolume 29, Issue 1, 59–93, Winter/Spring 2012

Ethical Considerations in FilingPersonal Bankruptcy: A HypotheticalCase StudyRobert J. Landry, III*

I. Introduction

Bankruptcy is one of the fields least written about by legal studies schol-ars. Bankruptcy-related topics have received little treatment in the scholarlyjournals published by the Academy of Legal Studies in Business (ALSB). Inrecent years, only one article in the Journal of Legal Studies Education (JLSE)has specifically addressed bankruptcy.1 Only a handful of bankruptcy arti-cles have been published in the American Business Law Journal (ABLJ).2 Paperpresentations at the ALSB’s annual conference typically include just a few

∗Associate Professor of Finance,College of Commerce and Business Administration, JacksonvilleState University, Jacksonville, Alabama.

1Sandra Benson & Wade M. Chumney, The Rise and Fall of a Ponzi Scheme: The Ideal Illustrationof the Law and Ethics of the Federal Bankruptcy Code, 28 J. Legal Stud. Educ. 273 (2011). Anearlier JLSE article included bankruptcy as an important subissue in the context of a tax casestudy. Lucien J. Dhooge & Cynthia F. Eakin, Integrating Tax Law into the Business Law Classroom:A Corporate “Cradle to Grave” Case Study, 19 J. Legal Stud. Educ. 271, 307–09 (2001).

2A Westlaw search on May 3, 2011, found five articles in the American Business Law Journalthat had bankruptcy in the title: Deborah A. Ballam, The “Willful and Malicious” Injury Exceptionto Discharge in Bankruptcy: An Analysis and Recommended Revision, 28 Am. Bus. L.J. 87 (1990);Frank P. Darr, Federal-State Comity in Utility Bankruptcies, 27 Am. Bus. L.J. 63 (1989); Gloria JeanLiddell et al., Charitable Contributions in Bankruptcy: An Empirical Analysis, 39 Am. Bus. L J. 99(2001); Jeffery M. Sharp, Returning Confidence to Prepetition Foreclosure Sales under the BankruptcyCode: Scrutinizing Federal Policy and a Vague Statute, 32 Am. Bus. L.J. 186 (1994); Jeffrey M. Sharp,Bankruptcy Reorganizations, Section 1129, and the New Capital Quagmire: A Call for CongressionalResponse, 28 Am. Bus. L.J. 525 (1991). The low incidence of bankruptcy topics in the scholarshipin the American Business Law Journal was noted by a former editor of that journal. See Larry A.DiMatteo, Editor’s Corner: The Value of Legal Studies Research, 43 Am. Bus. L. J. v (2006) (findingonly four manuscripts (5.2 percent) pertaining to commercial law, which included bankruptcyas a subtopic, over a five-year period).

C© 2012 The AuthorJournal of Legal Studies Education C© 2011 Academy of Legal Studies in Business

59

60 Vol. 29 / The Journal of Legal Studies Education

bankruptcy-related papers.3 The treatment of bankruptcy in legal studiestextbooks is typically consistent with the attention given in the scholarship.4

A great deal of research by legal studies scholars pertains to employ-ment law, international law, and corporate governance, as well as other fieldsincluding ethics and international law.5 The fields typically addressed arevery important and rightfully receive considerable attention in the scholar-ship and textbooks. However, bankruptcy as a learning tool is greatly un-derutilized. This observation is particularly true considering today’s globaleconomic climate, with so many high-profile bankruptcy cases in recent years,such as Enron,6 Worldcom,7 and Lehman Brothers,8 and the ever-increasingincidence of consumer bankruptcy.9

This article attempts to partially fill the void in the legal studies literatureby presenting a hypothetical case study of an individual who is in financial

3A review of the ALSB National Proceedings from 2005 through 2010 reveals only two articlesthat pertain to bankruptcy. See ALSB National Proceedings, http://alsb.roundtablelive.org/Default.aspx?pageId=478850 (last visited May 3, 2011).

4Usually only a chapter or a portion of a chapter in a text is devoted to bankruptcy. See, e.g.,Kenneth W. Clarkson et al., Business Law: Text and Cases 581–604 (12th ed. 2012);Marianne M. Jennings, Business: Its Legal, Ethical, and Global Environment 485–87(9th ed. 2012); Robert E. Meiners et al., The Legal Environment of Business 353–60(2012); Roger LeRoy Miller et al., Essentials of the Legal Environment 384–404 (3ded. 2011); Roger LeRoy Miller & Gaylord A. Jentz, Business Law Today: The Essentials466–82 (9th ed. 2011); O. Lee Reed et al., Legal and Regulatory Environment of Business526–27 (15th ed. 2010); Mark E. Roszkowski, Business Law: Principles, Cases, and Policy516–41 (6th ed. 2006).

5For example, in the American Business Law Journal the most prevalent topics over one five-yearperiod included employment law, intellectual property and corporate governance. DiMatteo,supra note 2, at vi.

6In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y. 2001).

7In re Worldcom, No. 02-13533 (Bankr. S.D.N.Y. 2002).

8In re Lehman Brothers Holdings, Inc., No. 08-13555 (Bankr. S.D.N.Y. 2008).

9Total bankruptcy filings have increased from 413,294 for the twelve-month period ending onMarch 31, 2007 to 1,118,481 for the twelve-month period ending on March 31, 2011. News Re-lease, Administrative Office of the U.S. Courts, Bankruptcy Filings up Slightly in March (May 6,2011), http://www.uscourts.gov/News/NewsView/11-05-06/Bankruptcy_Filings_Up_Slightly_in_March.aspx. Consumer bankruptcy filings have increased to such an extent that it is a rel-atively common occurrence. Ning Zhu, Household Consumption and Personal Bankruptcy, 40 J.Legal Stud. 1, 1 (2011) (“Personal bankruptcy has grown from a relatively rare householdevent a couple of decades ago to a fairly common occurrence today.”). See also Angela Littwin,The Affordability Paradox: How Consumer Bankruptcy’s Greatest Weakness May Account for its SurprisingSuccess, 52 Wm. & Mary L. Rev. 1933, 2017 (2011) (recognizing the ever increasing consumerbankruptcy filing rate in recent years).

2012 / Ethical Considerations in Filing Personal Bankruptcy 61

distress and who is presented with the decision of whether or not to file forbankruptcy protection.10 The case provides an opportunity to explore theethical ramifications of the decision. The case is not designed to teach thefiner points of bankruptcy law, which would be of little long-term value tothe typical business student.11

Following this introduction, Part II presents a brief literature review ofthe case study as a pedagogical tool. Part III provides a concise overview ofconsumer bankruptcy law in the United States, and Part IV discusses ethicaltheories that may be relevant in the bankruptcy decision-making process.Both sections are designed to provide a foundation for the case study pre-sented in Part V. Following the case study is a teaching note that includes thefollowing: learning objectives, potential uses of the case study, a discussionof the assigned case questions, and suggested approaches to evaluating stu-dents. Finally, the conclusion provides anecdotal information on the use ofthe case study.

II. Literature Review: Case Studyas a Pedagogical Tool

The case study method has been employed in a wide range of educationalsettings.12 The roots of its use in business schools can be traced back to

10Some academics have asserted that case studies concerning hypothetical situations are partic-ularly effective. See Joseph W. Rand, Understanding Why Good Lawyers Go Bad: Using Case Studiesin Teaching Cognitive Bias in Legal Decision-Making, 9 Clinical L. Rev. 731, 759 (2003). Excellentcase studies can also be developed from actual events or cases. See, e.g., Benson & Chumney,supra note 1 (case study based on an actual Ponzi scheme); Marisa Anne Pagnattaro, InternationalLegal and Ethical Considerations at Pfizer, Inc., 22 J. Legal Stud. Educ. 169 (2005) (case study toexplore ethical and legal consequences of drug company’s handling of three drugs).

11In many respects, law courses in business schools take a legalistic approach rather than em-phasizing the skills needed in making business decisions. This case takes the latter approach.For a detailed discussion of the need to refocus business school law courses away from being toolegalistic, see generally Marc Lampe, A New Paradigm for the Teaching of Business Law and LegalEnvironment Classes, 23 J. Legal Stud. Educ. 1 (2006) (arguing that that business school lawcourses should not attempt teach students to be lawyers, but rather to be business practitionersand presenting a new paradigm for business law courses to embrace teaching that enhances theskills that business practitioners actually need).

12Robert C. Bird et al., Troubled Times at Upturn Records: Getting Traditional Legal Concepts to Danceto the New Online Beat, 22 J. Legal Stud. Educ. 1, 3 at n.5 (2004) (“Case studies have beenutilized successfully in teaching such diverse fields as auditing, medicine, business, education,geography, and law.”); Jeffrey Pittman, Consumer Electronic v. Jones & Diamond: A Hypothetical Case


Harvard Business School, which has published cases studies since 1925.13

Use of case studies in business schools was a pedagogical innovation thatemployed experience-based learning.14 Today, the use of case studies hasgrown so much that it is among the most frequently used teaching methodsin business schools.15 Legal studies professors have also embraced the use ofthe case study.16 Likewise, law school professors have begun to use the casestudy approach in recent years17 rather than simply employing the traditionalSocratic method that was used to train most lawyers, at least until recent

Study, 20 J. Legal Stud. Educ. 117, 117–18 (2002) (recognizing the successful use of case studiesin a host of diverse fields).

13Celeste M. Hammond, Borrowing from the B Schools: The Legal Case Study as Course Materialsfor Transaction Oriented Elective Courses: A Response to the Challenges of the MacCrate Report and theCarnegie Foundation for Advancement of Teaching Report on Legal Education, 11 Transactions: Tenn.J. Bus. L. 9, 10 (2009–2010).

14Sarah J. Young et al., Best Case Scenario: The Development of a Teaching Tool for Sport Law, 14 J.leg. Aspects Sport 1, 1–2 (2004).

15Joseph F. Michlitsch & Meg Wright Sidle, Assessing Student Learning Outcomes: A ComparativeStudy of Techniques Used in Business School Disciplines, 77 J. Educ. Bus. 125, 126 (January/February2002) (national survey of business schools finding that faculty use case studies and problemassignments more than any other teaching method). See also Ann Rippin et al., A Complex Case:Using the Case Study Method to Explore Uncertainty and Ambiguity in Undergraduate Business Education,7 Teaching in Higher Educ. 429, 431 (2002) (observing that the case study is a dominantapproach in business education); Kenneth M. Rosen, Mickey, Can You Spare a Dime? Disneywar,Executive Compensation, Corporate Governance, and Business Law Pedagogy, 105 Mich. L. Rev. 1151,1156 (2007) (recognizing that case studies are often used by business professors).

16See Bird et al., supra note 12, (employing a hypothetical case study to teach traditional legalconcepts in the cyber environment); Pittman, supra note 12 (a hypothetical case study was usedto teach dispute resolution and various aspects of contract law ); Kurt M. Saunders, The Law andEthics of Trade Secrets: A Case Study, 42 Cal. W. L. Rev. 209 (2006) (employing a case study to teachlaw of trade secrets and ethical judgments confronted by businesses in that legal context). See alsoLorrie Willey & Debra D. Burke, A Constructivist Approach to Business Ethics: Developing a StudentCode of Professional Conduct, 28 J. Legal Stud. Educ. 1, 3 at n.9 (2011) (collecting citations tocase studies published in the JLSE in recent years).

17For example, a law professor has employed the case study method to teach Section 20 of theSecond Restatement of Contracts. See Mike Townsend, Teaching Contradiction: A Case Study, 33 Okla.City U. L. Rev. 97 (2008). In some areas of legal education, case studies and problems havebeen used extensively. See John S. Dzienkowski & Amon Burton, Ethical Dilemmas in thePractice of Law: Case Studies and Problems (2006) (employing case studies and problems inthe teaching of ethics and professional responsibility); Edward H. Rabin et al., Fundamentalsof Modern Property Law (4th ed. 2000) (relying extensively on problems and case studies inthe study of real property).


years.18 Particularly in the area of legal ethics, law professors have appreciatedthe benefits of employing case studies in teaching.19

There are multiple reasons to use case studies in education.20 First,it transforms the traditional role of teacher and student from the formermerely dispensing knowledge and the latter receiving knowledge, to an envi-ronment in which the students receive knowledge and apply that knowledgeto the problem presented.21 Applied learning through the case study ben-efits students because it may provide an opportunity to enhance students’decision-making and critical-thinking skills.22

Second, the case study simulates real life problems, which helps capturethe interest of students.23 The variety and student interest that a case studybrings to the classroom can bring disparate groups together and enhancestudent-centered learning.24 Effective use of the case study “stimulates stu-dent inquiry and the pursuit of knowledge.”25 When compared to the typicallecture method, the case study method more effectively stimulates learning.26

Case studies are popular with both faculty and business students, whichmay account for the high usage of the case study in business education. Ina national survey of business school faculty, next to exams, the case studywas perceived to be the most effective technique to determine student learn-ing.27 In a survey to assess learning preferences of business school students,

18There appears to be a great decline in the use of the Socratic method by law professors. RobertJ. Rhee, The Socratic Method and the Mathematical Heuristic of George Polya, 81 St. John’s L. Rev.881–82 (2007).

19For example, a symposium issue of the Fordham Law Review was devoted to case studies in legalethics. Carrie Menkel-Meadow, Foreword, Telling Stories in School: Using Case Studies and Stories toTeach Legal Ethics, 69 Fordham L. Rev. 787 (2000).

20For an excellent, concise overview of the benefits of the case study to graduate business lawcourses, see Debra Dobray & David Steinman, The Application of Case Method Teaching to GraduateBusiness Law Courses, 11 J. Legal Stud. Educ. 81, 82–86 (1993).

21Hammond, supra note 13, at 13-14.

22Sherry Finney & Joanne Pyke, Content Relevance in Case-Study Teaching: The Alumni Connectionand Its Effect on Student Motivation, 83 J. Educ. Bus. 251, 251–52 (2008).

23Rippin et al., supra note 15, at 431.

24Finney & Pyke, supra note 22, at 251; Rippin et al., supra note 15, at 431.

25Rippin et al., supra note 15, at 431.

26Dobray & Steinman, supra note 20, at 82.

27Michlitsch & Sidle, supra note 15, at 128.


researchers found that nearly 45 percent of the students surveyed desiredadditional case studies.28

Nonetheless, the case study method is not without critics. For example,some business scholars have raised concerns that the case study should notserve as a substitute for other learning activities.29 Legal studies scholars havedebated the use of the case study in the context of graduate business lawcourses. In 1993, Dobray and Steinman made a strong case for the use of thecase study in graduate law courses because it “helps students acquire cognitiveskills, enhances managerial abilities, and give students practice in decision-making by simulating managerial predicaments.”30 In a reply to the Dobrayand Steinman article, Leibman argued against the use of the case studymethod for graduate business law courses because doing so would transformthe course to a business policy course.31 This transformation, according toLeibman, would run contrary to the principal objective of a legal studiesprofessor, “which is to instruct managers in how the legal systems works, howit got that way and how it is likely to respond tomorrow.”32

Legal studies professors should embrace the objective espoused by Leib-man; however, the case study as an educational tool, coupled with other tools,does not necessarily run counter to that objective. In fact, employing a widearray of pedagogical tools, including case studies, can enhance student learn-ing and actually help achieve Leibman’s objective. The traditional Socraticmethod, in and of itself, likely is insufficient to effectively address the scopeof legal studies courses. Case studies may be particularly appropriate for ex-amining topics such as ethics and decision making, which are quite oftenconsidered in legal studies courses. This article proposes that a case studymay also enrich coverage of bankruptcy.

28Prateek Goorha & Vijay Mohan, Understanding Learning Preferences in the Business School Curricu-lum, 85 J. Educ. Bus. 145, 148 (2010).

29Patricia R. McCarthy & Henry M. McCarthy, When Case Studies Are Not Enough: IntegratingExperiential Learning into Business Curricula, 81 J. Bus. Educ. 201, 201–03 (2006) (recognizes thevalue of case studies but arguing that other experiential learning, such as job shadowing, shouldbe part of business curricula).

30Dobray & Steinman, supra note 20, at 82.

31Jordan H. Leibman, In Defense of the Legal Case Method and the Use of Integrative Multi-Issue Casesin Graduate Business Law Courses, 12 J. Legal Stud. Educ. 171, 172 (1994).

32Id.


III. Overview of Consumer Bankruptcy in theUnited States

Prior to the case study being incorporated into class, students will need abasic overview of bankruptcy law in the United States.33 The students do notneed to be experts on bankruptcy law, but a more detailed treatment thanthat which is normally provided in the typical legal and social environmentor business law course would be desirable. An understanding of the majortypes of bankruptcy protection and the legal ramifications of each, as well asan appreciation of the policy behind bankruptcy, is needed to evaluate andexplore fully the relationship between law and ethics in the case study.

This part provides a concise overview of bankruptcy law and policy tosupplement that which is found in the typical legal and social environmentor business law text.34 This part also references other resources that provideexcellent summaries of bankruptcy law provided to assist instructors that wishto incorporate materials outside of their text into their class.

A. Consumer Bankruptcy System

Bankruptcy is a vital component of the United States’ economic framework.Capitalism encourages risk taking in our economy. It is inevitable that somefinancial endeavors will not proceed as envisioned, and financial failures willoccur. Absent a mechanism for individuals in the midst of financial failures toeffectively address their financial problems, individuals would potentially beburdened by debt for the rest of their lives. Consider, for example, the recentmortgage crisis.35 An individual whose home has been placed in foreclosure

33Other case studies have recognized that it is important to provide students a foundation in thesubstantive area the case study prior to its introduction. See, e.g., Konrad S. Lee, An Exercise forTeaching the Employment Law Implications of Employee Blogging, 26 J. Legal Stud. Educ. 399, 402(2009).

34See supra note 4.

35For an overview of the causes of the current mortgage crisis, see Michael Aleo & PabloSvirsky, Foreclosure Fallout: The Banking Industry’s Attack on Disparate Impact Race DiscriminationClaims under the Fair Housing Act and the Equal Credit Opportunity Act, 18 B.U. Pub. Int. L.J. 1,8–14 (2008) (outlining the role that deregulation of the mortgage industry, coupled with therole that brokers, lenders and borrowers played in the current mortgage crisis); David A. Dana,A Simple Approach to Preventing the Next Housing Crisis—Why We Need One, What One Would LookLike, and Why Dodd-Frank Isn’t It, 38 Fordham Urb. L.J. 721, 721–26 (2011) (providing anoverview of the causes and ramifications of the crisis); David A. Dana, The Foreclosure Crisis and the


will likely continue to owe a debt to the lender based on the deficiency balanceowed after the foreclosure. It is very likely that the debt will be a substantialamount. Without a mechanism to deal with this debt, the individual may beburdened with that debt for the rest of his or her life. Such an ongoing burdenwill likely stifle the individual’s future economic opportunities and act as adisincentive to engaging in future financial endeavors. Bankruptcy provides amechanism to address the individual’s financial problem in a comprehensiveway and to improve an individual’s “incentives to work, spend, and save inthe future.”36

Bankruptcy is so important to our capitalistic economy that it has beensaid that “capitalism without bankruptcy is like Christianity without hell.”37

The founding fathers, by including the Bankruptcy Clause38 in the Constitu-tion, recognized the importance of a bankruptcy system to address financialproblems and failures. Early bankruptcy legislation in the United States wastypically passed after economic downturns and repealed during economicupswings, so that bankruptcy legislation followed a bust and boom pattern.39

With the enactment of the Bankruptcy Act of 1898,40 bankruptcy law became

Antifragmentation Principle in State Property Law, 77 U. Chi. L. Rev. 97, 102–09 (2010) (discussingthe role that fragmentation of property interests has played in the mortgage crisis); RobertHardaway, The Great American Housing Bubble: Re-Examining Cause and Effect, 35 U. Dayton L.Rev. 33, 33–45 (2009) (reviewing the wide range of causal factors asserted as the cause of themortgage crisis); Kenneth C. Johnston et al., The Subprime Morass: Past, Present, and Future, 12 N.C.Banking Inst. 125, 125–31 (2008) (discussing the role of unemployment, subprime mortgagelending and the decline in housing values played in the current crisis); Jennifer M. Smith,Mortgage Foreclosures, Mortgage Morality, and Main Street: What’s Really Happening?, 25 J. Civ. Rts.& Econ. Dev. 525, 530–44 (2011) (providing an overview of the theories asserted as causes of thecurrent crisis, including subprime lending, government regulation, government deregulationand securitization).

36Katherine Porter, Life After Debt: Understanding the Credit Restraint of Bankruptcy Debtors, 18 Am.Bankr. Inst. L. Rev. 1, 1 (2010).

37J. Madeleine Nash et al., The Growing Bankruptcy Brigade, Time, Oct. 18, 1982, at 90 (quot-ing Frank Borman, former chairman of Eastern Air Lines), available at http://www.time.com/time/magazine/article/0,9171,949605-4,00.html.

38U.S. Const. art. I, § 8, cl. 4 (“To establish . . . uniform Laws on the subject of Bankruptciesthroughout the United States”).

39David A. Skeel, Jr., Debts Dominion: A History of Bankruptcy Law in America 24(2001); Harvey R. Miller & Shai Y. Waisman, Does Chapter 11 Reorganization Remain a Viable Optionfor Distressed Businesses for the Twenty-First Century, 78 Am. Bankr. L.J. 153,159 (2004).

40Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (1898).


a permanent part of the United States’ legal system.41 The current bankruptcysystem in the United States, established in the Bankruptcy Code,42 has beenin place since the enactment of the Bankruptcy Act of 1978.43

The Bankruptcy Code embraces two competing goals of consumerbankruptcy: one focuses on the debtor, and the other focuses on creditors.For the individual debtor, consumer bankruptcy is designed to provide a freshstart through a discharge of debt.44 Relieving the burden of preexisting debtspermits the individual to “rejoin the economy as a productive member ofsociety.”45 The fresh start principle is a core underpinning of consumer law inthe United States.46 The second goal of consumer bankruptcy is to providean equitable distribution of available assets among creditors.47

Most consumer bankruptcies are filed under Chapter 748 or Chapter1349 of the Bankruptcy Code.50 Under either chapter, the bankruptcy case

41Skeel, supra note 39, at 23.

4211 U.S.C. §§ 101-1532 (2006).

43Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978).

44See, e.g., Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393(1985) (exploring the important role of the discharge in bankruptcy law).

45Rafael Efrat, The Moral Appeal of Personal Bankruptcy, 20 Whittier L. Rev. 141, 141 (1998).

46Katherine Porter & Deborah Thorne, The Failure of Bankruptcy’s Fresh Start, 92 Cornell L. Rev.67, 71 (2006) (“The long-standing and much-touted theory of consumer debt relief is that itprovides a fresh start for debt-laden individuals.”).

47Joseph Pace, Note, Bankruptcy as Constitutional Property: Using Statutory Entitlement Theory toAbrogate State Sovereign Immunity, 119 Yale L.J. 1568, 1581 (2010). See also Paul F. Kirgis, Arbitration,Bankruptcy, and Public Policy: A Contractarian Analysis, 17 Am. Bankr. Inst. L. Rev. 503, 505(2009) (observing that “[B]ankruptcy serves the interests of creditors by providing them with anequitable distribution of the debtor’s nonexempt assets.”).

4811 U.S.C. §§ 701-728 (2006).

4911 U.S.C. §§ 1301-1330 (2006).

50Rachel M. Helmers, Comment, Another Thorn in the “Semantic Briar Patch” of the Hanging Para-graph: Is Negative Equity a Purchase Money Security Interest? 93 Marq. L. Rev. 1217, 1244 (2010)(“The vast majority of consumer debtors will choose between Chapter 7 and Chapter 13bankruptcy.”); Cheri L. Cohen, Chapter 11 for Individual Consumer Debtors: Fresh State or FalseStart? 13 N. Ill. U. L. Rev. 401 (1993) (recognizing that normally individuals file for protectionunder Chapter 7 or 13). Individuals can file for relief under Chapter 11 or Chapter 12 of theBankruptcy Code, but individual consumer filings under these chapters are rare. Robert M.Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am. Bankr.L.J. 349, 387 (2008).


is commenced by filing a petition for bankruptcy relief.51 The filing of thecase triggers an automatic stay of all collection efforts against the debtor andthe debtor’s property.52 This automatic stay is important as it advances thegoals of a fresh start and equitable distribution of assets because it permitsa debtor’s financial problems to be addressed under the framework of theBankruptcy Code, rather than in a piecemeal fashion. The automatic stayeffectively gives a debtor a breathing spell and ensures equal treatment forcreditors.53

Typically an individual Chapter 7 debtor will receive a discharge ofmost unsecured debts,54 other than certain categories of debts such as childsupport, student loans, alimony, and taxes.55 Except for a limited amountof assets that are protected from collection,56 the debtor must surrender his

5111 U.S.C. § 301 (2006).

5211 U.S.C. § 362(a) (2006).

53Douglas G. Smith, Resolution of Mass Tort Claims in the Bankruptcy System, 41 U.C. Davis L. Rev.1613, 1639 (2008).

5411 U.S.C. § 727(a) (2006).

55Lars Lefgren & Frank McIntyre, Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates,52 J. L. & Econ. 367, 370 (2009).

56Certain assets are exempt from liquidation. 11 U.S.C. § 522(d) (2006). The exemption ofcertain basic assets is designed to provide debtors with a minimal amount of assets, so that theycan move forward after bankruptcy. Exemptions are intended to serve as a protective measurefor individual debtors and their families. Amanda K. Bloch, Comment, Approaching the Limitsof the Bankruptcy Code: Does Surcharging a Debtor’s Exempt Assets Go Too Far?, 76 U. Chi. L. Rev.1747, 1753 (2009) (recognizing exemption laws are measures that protect debtors and providebasic necessities of life after bankruptcy); James Winston Kim, Comment, Saving Our Future:Why Voluntary Contributions to Retirement Accounts are Reasonable Expenses, 26 Emory Bankr. Dev.J. 341, 363 (2010) (“The purpose of the exemptions is to provide the debtor with the meansto support themselves post-bankruptcy.”); Richard M. Lombino, Note, Uniformity of Exemptions:Assessing the Commission’s Proposals, 6 Am. Bankr. Inst. L. Rev. 177, 177–79 (1998) (discussingthe essential role that exemptions play in permitting a debtor and the debtor’s family to emergefrom bankruptcy). The exact exemptions a particular debtor will be afforded in bankruptcy willdepend on in what state the debtor resides. The Bankruptcy Code permits states to opt out ofthe federal exemptions available under the Code so that debtors are required to use state lawexemptions in a bankruptcy case. 11 U.S.C. § 522(b)(2) (2006); Brady M. Peterson, ExemptionStacking in Montana Bankruptcies—“Windfall” or “Fresh Start”, 64 Mont. L. Rev. 543, 545 (2003).Thirty-four states have legislation that requires debtors to use the applicable state exemptions,rather than the federal exemptions. Peterson, id. at 545, n.12. Exemptions vary a great dealfrom state to state with some states providing very generous exemptions and others providingvery limited exemptions. Charles Grant et al., Redistributive Taxation and Personal Bankruptcy inU.S. States, 52 J.L. & Econ. 445, 456 (2009). Some states, such as Texas and Florida, permit an


or her assets so they can be liquidated and the proceeds of the liquidationdistributed to creditors under a priority scheme set forth in the BankruptcyCode.57 This process of asset liquidation, coupled with a discharge of debts,allows a debtor to emerge from Chapter 7 with a fresh start. The process forthe typical Chapter 7 debtor is relatively fast: most debtors receive a dischargea matter of months after filing for bankruptcy protection.58 Interestingly, inmost Chapter 7 cases, there is no actual liquidation of assets because thereare no assets of any value worth liquidating.59

Under Chapter 13, a debtor generally keeps assets but is required,through a court-approved plan, to repay a portion of the debtor’s debts.60

The plan payment period runs from three to five years,61 and the amountpaid to unsecured creditors under the plan must be at least as much as wouldbe paid if the case were liquidated under Chapter 7.62 The plan must providethat secured creditors will be paid in full or provide for the surrender of thecollateral securing the debt.63 A court-appointed trustee receives the planpayments and distributes the funds to creditors.64 Upon completion of the

unlimited homestead exemption. Id. Other states have very limited homestead exemptions. SeeAla. Code § 6-10-2 (1976) (homestead exemption is $5,000 per single person and 10,000 per acouple); Tenn. Code Ann. § 26-2-301 (1996) (providing for a $5,000 homestead exemption foran individual or a $7,500 exemption per a couple). The result is disparate treatment of debtorsfrom state to state in a bankruptcy case based on the varying state law exemptions. The lack ofuniformity of exemptions in bankruptcy cases is a matter of great debate. See William HoustonBrown, Political and Ethical Considerations of Exemption Limitations: The “Opt-Out” as Child of the Firstand Parent of the Second, 71 Am. Bankr. L. J. 149, 170–187 (1997) (providing a comprehensivereviewing the arguments and authorities for and against uniform exemptions in a bankruptcycase).

57Porter, supra note 36, at 6. See also 11 U.S.C. § 726(a) (2006) (providing the statutory schemefor distribution of assets among creditors).

58Helmers supra note 50, at 1245.

59Emily Gildar, Comment, Arizona’s Anti-Deficiency Statutes: Ensuring Consumer Protection in a Fore-closure Crisis, 42 Ariz. St. L.J. 1019, 1028 (2010) (“Most Chapter 7 filings are no-asset cases,meaning the debtor has little or no assets to distribute to his unsecured creditors.”).

60Lefgren & McIntyre, supra note 55, at 370.

61Porter, supra note 36, at 6.

62M. Jonathan Hayes & James T. King, A Chapter 13 Primer for Non-Chapter 13 Bankruptcy Attorneys,30 Cal. Bankr. J. 41, 41 (2009).

63Id. at 57.

64Id.


plan, the debtor usually is discharged of remaining unsecured debts.65 OftenChapter 13 is employed if a debtor has assets, such as a home, that the debtorwishes to retain.66

B. Consumer Bankruptcy Reform

The Bankruptcy Abuse Prevention and Consumer Protection Act of 200567

(Reform Act) changed the landscape of consumer bankruptcy in the UnitedStates.68 The details of the Reform Act are well beyond the scope of thisarticle and most business courses, but it is important to recognize that theReform Act rewrote the conceptual framework and shifted basic policy ofthe Bankruptcy Code from one that favored debtors to one that favoredcreditors.69 The Reform Act is designed to reduce the number of Chapter 7consumer bankruptcy filings so that the overall purpose of the Reform Actcan be achieved: “to ensure that debtors who can pay back a portion of theirdebts do so.”70

The primary tool to limit the number of Chapter 7 filings is the statutorymeans test.71 The means test is a formula used to determine if a Chapter 7debtor can repay a portion of the unsecured creditors.72 The means test has

65Lefgren & McIntyre, supra note 55, at 370-1.

66See In re Brown, 121 B.R. 768, 771 (Bankr. S.D. Ohio 1990) (recognizing that a paramount goalof Chapter 13 is the retention of homes).

67Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119Stat. 23 (2005).

68See, e.g., George H. Singer, The Year in Review: Case Law Developments under the Bankruptcy AbusePrevention and Consumer Protection Act of 2005, 29 Cal. Bankr. J. 37, 88 (2007) (recognizing thatthe Reform Act changed the dynamics and landscape of consumer bankruptcy in the UnitedStates).

69Prior to the Reform Act, bankruptcy law had a presumption in favor of the debtor, but theReform Act deleted that presumption in favor of the debtor. Id. at 88.

70In re Gbadebo, 431 B.R. 222, 229 (Bankr. N.D. Cal. 2010).

71Singer, supra note 68, at 88. For a detailed overview of the application of the means test, seeRobert J. Landry, III, The Means Test: Finding a Safe Harbor, Passing the Means Test, or Rebutting thePresumption of Abuse May Not Be Enough, 29 N. Ill. U. L. Rev. 245, 251–57 (2009) (analyzing thestatutory framework and how the means test is applied); Eugene R. Wedoff, Means Testing inthe New § 707(b), 79 Am. Bankr. L.J. 231, 240–77 (2005) (providing a detailed analysis of themechanics of the means test).

72Singer, supra note 68, at 88.


two prongs: (1) a median income test and (2) an ability to repay test.73 If adebtor’s annual median income is below the applicable median income ofthe debtor’s state then the debtor passes the means test74 and typically canproceed in Chapter 7. If the debtor’s annual median income is above theapplicable household median income, then the debtor must complete a de-tailed schedule of expenses to arrive at monthly disposable income availableto repay creditors.75 If the debtor has sufficient monthly disposable incometo repay unsecured creditors under the means test76 then a presumptionarises that the granting of a Chapter 7 discharge is an abuse.77 The debtoris then subject to dismissal or can voluntarily convert the case to Chapter 13and formulate a repayment plan.78

C. Additional Bankruptcy Resources

Several substantive Web-based resources may be incorporated in total or inpart to emphasize certain aspects of bankruptcy law in a particular course. Anexcellent resource is the United States Courts’ Web site that contains a wealthof information on bankruptcy.79 Although there is information covering allmajor aspects of bankruptcy, several aspects of the Web page are particularlyuseful and can serve as introductory material to aid students with the case

73Landry, supra note 71, at 256.

74Id. at 256. See also 11 U.S.C. § 707(b)(7) (2006) (providing that below-median income debtorsare not subject dismissal for abuse under the detailed means test calculation).

75Landry, supra note 71, at 257. See also 11 U.S.C. § 707(b)(2)(A) (2006) (providing for theapplication of the detailed means test for above-median income debtors).

76The determination of whether a debtor has sufficient monthly disposable income to repaycreditors so as to warrant a presumption of abuse is set forth in the Bankruptcy Code. If adebtor’s current monthly income, less reductions authorized under the means test, multipliedby 60 is at least “(I) 25 percent of the debtor’s nonpriority unsecured claims in the case, or$7,025, whichever is greater; or (II) $11,725,” then the presumption of abuse arises. 11 U.S.C. §707(b)(2)(A)(i)(I)-(II) (2006).

77Singer, supra note 68, at 88-89.

78Id. at 89.

79Bankruptcy, U.S. Courts, http://www.uscourts.gov/FederalCourts/Bankruptcy.aspx (last vis-ited Aug. 20, 2011). Other scholars have recommended the U.S. Courts’ Web site. See Benson &Chumney, supra note 1, at 318.


study. The materials on the bankruptcy process,80 discharge in bankruptcy,81

Chapter 7,82 and Chapter 1383 are all worth considering as supplementalreading.84

The National Consumer Law Center85 publishes several informationalbrochures that are available without charge on its Web site. These pro-vide useful, concise overviews of consumer bankruptcy. Particularly usefulis the bankruptcy client brochure, Answers to Common Bankruptcy Questions,86

which provides an easy-to-read primer on consumer bankruptcy. Similarly,the American Bankruptcy Institute87 Web page provides a readable resourcecovering most basic aspects of consumer bankruptcy.88

Bankruptcy statistics can also be used to show the high incidenceof bankruptcy in the United States, demonstrating the importance of thetopic. The United States Courts’ Web site89 and the American Bankruptcy

80Process, U.S. Courts, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Process.aspx (last visited Aug. 20, 2011).

81The Discharge in Bankruptcy, U.S. Courts, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/DischargeInBankruptcy.aspx (last visited Aug. 20, 2011).

82Chapter 7, U.S. Courts, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx (last visited Aug. 20, 2011).

83Chapter 13, U.S. Courts, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx (last visited Aug. 20, 2011).

84The extent that an instructor will need to rely on outside reading will depend on the treatmentprovided in the textbook being used as well as the instructor’s background in bankruptcy law.

85The National Consumer Law Center is a nonprofit organization designed to promote eco-nomic security for disadvantaged Americans. About Us, National Consumer Law Center,http:// www.nclc.org/ (last visited Aug. 21, 2011).

86Bankruptcy Client Brochure: Answers to Common Bankruptcy Questions, National ConsumerLaw Center, http://www.nclc.org/for-consumers/brochures-by-topic.html (last visited Aug.21, 2011).

87The American Bankruptcy Institute is a “non-partisan organization dedicated to researchand education on matters related to insolvency. ABI was founded in 1982 to provide Congressand the public with unbiased analysis of bankruptcy issues.” About ABI, American BankruptcyInstitute, http://www.abiworld.org/AM/Template.cfm?Section=About_ABI (last visited Aug.21, 2011).

88Frequently Asked Questions, American Bankruptcy Institute Consumer Bankruptcy Cen-ter, http:// consumer.abi.org/consumers/faq (last visited Aug. 21, 2011).

89Bankruptcy Statistics, U.S. Courts, http://www.uscourts.gov/Statistics/BankruptcyStatistics.aspx (last visited Aug. 21, 2011).


Institute Web site90 provide bankruptcy data that is easily accessible and canbe incorporated in the classroom.

IV. Ethical Frameworks Relevant to theBankruptcy Decision

The laws discussed above provide a framework if the decision is made topursue bankruptcy. What factors should be taken into account in reachingsuch a decision? Prompting students to consider decision making in thiscontext is a central focus of the case study described here. When a particulardecision raises moral issues, then the ethics of the decision is a relevantcomponent of the decision-making process.91

In the consumer bankruptcy field, many scholars and researchers fo-cus solely on a pure economic analysis of why individuals file consumerbankruptcy,92 but other factors, including an individual’s moral beliefs aboutright and wrong, likely impact the decision to file bankruptcy.93 The eth-ical decision-making process is rooted in an individual’s moral standards,which help guide the decision.94 If filing bankruptcy conflicts with an indi-vidual’s moral belief, then the individual may not engage in the act—filingbankruptcy.95 The conflict leads to a bad conscience that can serve as a

90Bankruptcy Statistics, American Bankruptcy Institute, http://www.abiworld.org/Content/NavigationMenu/NewsRoom/BankruptcyStatistics/Bankruptcy_Filings_1.htm (last visited Aug.21, 2011).

91David J. Fritzsche, Business Ethics: A Global and Managerial Perspective 62 (2d ed.2005).

92The neoclassical economic model of predicting bankruptcy filings is widely used to showwhy individuals file bankruptcy, but the effectiveness of this pure economic approach has beenchallenged in recent studies. See Efrat, supra note 45, at 145-149 (providing an overview of the lit-erature highlighting the limitations of the neoclassical economic model at predicting bankruptcyfilings). See also Todd J. Zywicki, An Economic Analysis of the Consumer Bankruptcy Crisis, 99Nw. U. L. Rev. 1463, 1540–41(2005) (arguing that the traditional model fails to explain thegreat rise in consumer bankruptcy filings over the last twenty-five years.).

93See Efrat, supra note 45, at 149-50 (suggesting that noneconomic factors, such as social stigma,morality, demographics and legal culture, may help explain why individuals choose to filebankruptcy).

94See Fritzsche, supra note 91, at 46 (recognizing that business ethics stems from employingmoral standards in decision making).

95Id. at 151


deterrent to filing.96 Whether or not filing bankruptcy conflicts with an in-dividual’s moral belief depends on the ethical standards or principles uponwhich the individual relies.97

Many ethical theories are classified as consequentialist and nonconse-quentialist theories. Both classifications of ethical theories can help providea framework to analyze the decision-making process in deciding to file ornot file bankruptcy. Beyond those two ethical theories, another ethical the-ory, ethical relativism, can also be useful in analyzing the decision-makingprocess.98 The bankruptcy decision-making process is examined below, withreference to these theories. This section concludes with an ethical decision-making model that can be employed by students as a framework for workingthrough the bankruptcy decision-making process.

A. Consequentialist Theories

Consequentialist theory focuses on the end result or outcome of a particulardecision.99 It is the consequence of the act that is the guidepost to determineif it is ethical.100 The act at issue has no intrinsic value, but rather it is theconsequences produces and impact on others that is the focus.101

Philosopher John Stuart Mill is often associated with utilitarianism,the most common consequential theory.102 The primary concern is whetherthe act promotes the common good103 or maximizes social utility.104 Underconsequentialist theory, the ethics of a particular decision is often framed as

96Id.

97See id. at 46 (recognizing that moral standards or principles are used in making businessdecisions.).

98While other specific ethical theories may be applicable to the bankruptcy decision, for sim-plicity and ease of application in the classroom the case study analysis is limited to these twoframeworks and ethical relativism. These permit a thoughtful analysis of the issues.

99Fritzsche, supra note 91, at 46; Judith White & Susan Taft, Frameworks for Teaching and LearningBusiness Ethics within the Global Context: Background of Ethical Theories, 28 J. Mgmt. Educ. 463, 465(2004) (“[C]onsequentialist approaches to ethics emphasize the consequences or results of anaction or decision.”).

100Pagnattaro, supra note 10, at 191.

101White & Taft, supra note 99, at 465.

102Saunders, supra note 16, at 232, n.139.

103Id.

104Id. at 233.


“Do the ends justify the means?”105 The morality of a decision is determinedby whether or not it produces the great good for the greatest number.106

Decisions based on utilitarianism are meant to promote the welfare of peopleby maximizing benefits and minimizing harm.107 The decision maker is notconcerned with duties, justice, or rights, as the focus is on the consequencesof the act.108

An individual faced with serious financial distress likely is not goingto consider the maximization of the utility for all, so utilitarianism likelyplays a small role in most bankruptcy decisions. However, one might applythat analysis and conclude that bankruptcy is appropriate. In some cases,individuals file bankruptcy and restructure their obligations and repay someor all of their debts. In such cases, the decision maker may actually determinethat bankruptcy promotes utility for all possible stakeholders because withoutthe protection of bankruptcy law, there would be no way to repay all creditorsor to at least treat all stakeholders the same through an organized bankruptcyprocess.

Another form of consequentialism, egoism,109 may be quite relevantin the bankruptcy decision. Egoism focuses on the self-interest of the de-cision maker so that decisions are made that lead to the most favorableconsequences for the decision maker without regard to the consequences toothers.110 There are two varieties of egoism.111 Psychological egoism claims


106Saunders, supra note 16, at 233. See also Tammy W. Cowart & Wade M. Chumney, I Phone,You Phone, We all Phone with iPhone: Trademark Law and Ethics from an International and DomesticPerspective, 28 J. Legal Stud. Educ. 331, 351 (2011) (Utilitarianism “is often understood asadvocating a position that promotes the greatest amount of good for the greatest number ofpeople.”); Jennifer M. Mitchell & Eric D. Yordy, COVER It: A Comprehensive Framework for GuidingStudents Through Ethical Dilemmas, 27 J. Legal Stud. Educ. 35, 60 (2010) (“A utilitarian analysiswill, in essence, lead you to choose the alternative that creates the ‘greatest good for the greatestnumber’ or the ‘least overall harm.’”); Thomas R. Wotruba, A Framework for Teaching EthicalDecision Making in Marketing, 3 Mkt. Educ. Rev. 2, 4 (1993) (Under utilitarianism the “rightaction is that which produces the greatest good for the greatest number.”).


108Id.

109See Fritzsche, supra note 91, at 46-49 (providing an overview of egoism).

110Id. at 46; White & Taft, supra note 99, at 465 (“[E]goism. . . focuses on the maximization ofan individual’s own self-interest. . .regardless of the consequences to others.”).

111Jay Tidmarsh, Rethinking Adequacy of Representation, 87 Tex. L. Rev. 1137, 1143 (2009).


that individuals only act in their self-interest, whereas ethical egoism claimsthat individuals should act in their self-interest.112

The bankruptcy decision may be considered in light of egoism. Theability to obtain debt forgiveness promotes an individual’s own interest at thecost of others. The impact on creditors would not be a concern because thefocus is on the consequences for the individual associated with the filing ofbankruptcy. The discharge provided to the individual and ability to have afresh start would be paramount to the individual as he or she evaluated theconsequences of the decision.

B. Nonconsequentialist Theories

Nonconsequentialist theories emphasize the process or means to an outcomerather than the outcome itself.113 There are two main branches of noncon-sequentialist theories: deontological ethics and virtue ethics.114 Deontology,referred to as duty-based ethics,115 emphasizes universal principles as ethicalguideposts.116 With deontology, there is an emphasis on the “moral qual-ity of the action.”117 There is no focus on the consequences of an act.118

There are certain moral absolutes such as not lying.119 From the deontology

112Id. See also Waymond Rodgers & Susana Gago, Biblical Scriptures Underlying Six Ethical ModelsInfluencing Organizational Practices, 64 J. Bus. Ethics 125, 129 (2006) (Ethical egoism “assertsthat individuals ought to do what serves their self-interest.”). Although ethical egoism is oftenpracticed there is no agreement on whether it is adequate as an ethical system. Edward RegisJr., What Is Ethical Egoism, 91 Ethics 50, 50 (1980). A primary criticism of egoism is that theemphasis on the self-interest leads to an inconsistency in terms of what is ethical from personto person. See id. at 50, 55-6. Egoism’s emphasis on the individual’s interest exclusively results inan arbitrary doctrine. Stuart Rachels & Torin Alter, Nothing Matters in Survival, 9 J. Ethics 311,330 (2005). For a comprehensive treatment of the debate on the adequacy of ethical egoism asa bona fide ethical theory, see Tibor R. Machan, Recent Work in Ethical Egoism, 16 Am. Phil. Q.1, 2–13 (1979).

113Dean Bartlett, Management and Business Ethics: A Critique and Integration of Ethical Decision-making Models, 14 Brit. J. Mgmt. 223, 224 (2003).

114Tidmarsh, supra note 111, at 1143.

115Mitchell & Yordy, supra note 106, at 60.


117Tidmarsh, supra note 111, at 1143.


119Id.


perspective, there are certain activities that should not be engaged in, evenif doing so would maximize utility.120

If the bankruptcy decision is made employing a deontologist approach,the emphasis will be on whether filing bankruptcy is right or wrong in andof itself. There is no regard for the outcome, whether it is good or bad forthe actor or others. For some individuals, this may be an overriding part ofthe decision. For example, the effect of filing bankruptcy is to obtain debtforgiveness. This entails breaking a promise the individual made to repay adebt. Some individuals may view this promise breaking as a moral wrong, eventhough it is permitted under bankruptcy law. Such a person may attempt toavoid bankruptcy if at all possible.

From the deontological perspective, a relationship of mutual trust leadsto an “internalized moral system,” which discourages individuals in such re-lationship to breach the trust relationship.121 However, the relationship be-tween a debtor and creditor, particularly when the creditor is an institutionso that it is an interpersonal relationship, may not seem to be one of trust; theindividual debtor may recognize less of an incentive to avoid bankruptcy.122

The impersonalization of the bankruptcy process—handled largely throughpaperwork and lawyers—may impact the decision to file. There is no personalstake or emotional feeling to trigger the moral based deterrent to break thedebtor-creditor trust relationship.123 In effect, the increased lack of personalcomponent in the credit relationships leads to a decline in the moral obliga-tion or duty to honor the obligation and to avoid bankruptcy.124

Formalism, a strict type of deontology which focuses on whether an actis wrong or right in and of itself, regardless of the result,125 is also applicableto the bankruptcy decision. This strict deontology is often associated withImmanuel Kant.126 Kant developed a categorical imperative: “Act as if the

120Rodgers & Gago, supra note 112, at 131.

121See Efrat, supra note 45, at 160.

122Id. at 160-62.

123Id. at 161-2.

124See Zywicki, supra note 92, at 1535-36 (recognizing that the nonpersonal nature of the creditrelationship can make avoiding paying debts more likely).

125Saunders, supra note 16, at 229; White & Taft, supra note 100, at 466 (“[C]ertain actions inthemselves are intrinsically good or bad or right or wrong, and are not to be judged by theirresults.”).

126Saunders, supra note 16, 229.


maxim of thy action were to become by thy will a universal law of nature.”127

The premise is that an individual should “act as if the rule underlying theaction could become a universal law.”128 The idea is that what is right for oneindividual should be right for all individuals.129 If the act chosen is somethingthat has universal application, then the act is ethical.130

Kant’s categorical imperative can be applied to the bankruptcy decision.For example, if an individual decides to file bankruptcy and not repay hisor her debts, the individual cannot “universalize” that act. If the decision tofile bankruptcy was a universal law so that no one repaid debts, then lendingwould cease to occur. The individual considering bankruptcy would not wantsuch a universal principle. The individual would want an exception for himor herself. Therefore, the decision to file bankruptcy would be unethicalbecause such a decision could not be justified as a universal principle.131

Another formulation of nonconsequentialist theory, virtue ethics,132

can play a role in the bankruptcy decision-making process. Aristotle, con-sidered the founding father of virtue ethics,133 “prescribes living one’s lifeand behaving according to recognized virtues.”134 Virtue ethics stresses anindividual’s moral character development.135 Under virtue ethics, individualchoices are derived from the individual’s character.136 Virtue ethics is depen-dent on the internal qualities of an individual or the qualities the individual

127O.C. Ferrell et al., Business Ethics: Ethical Decision Making and Cases 158 (8th ed.2011) (citing C.E. Harris, Jr., Applying Moral Theories, 128–29 (1986)).

128Wotruba, supra note 106, at 4.


130Ferrell et al., supra note 127, at 158.

131For a similar analysis based on individuals borrowing money with no intention of repayingtheir loans, see Ferrell et al., supra note 127, at 158. Other factual scenarios, such are breachingcontracts, can be used to highlight the main thrust of Kantian formalism. See Saunders, supranote 16, at 230.

132See White & Taft, supra note 99, at 466-67 (recognizing that virtue ethics is a type of de-ontological approach to ethics and that deontology is a type of nonconsequentialist ethicalreasoning).

133Irene van Staveren, Beyond Utilitarianism and Deontology: Ethics in Economics, 19 Rev. Pol. Econ.21, 26 (2007).


135Tidmarsh, supra note 111, 1143.

136Jeffrey Nesteruk, The Moral Dynamics of Law in Business, 34 Am. Bus. L.J. 133, 137 (1996).


strives to have.137 What is ethical in a given situation is based on both whatconventional morality requires and “what the mature person with a ‘good’moral character would deem appropriate.”138 Viewed from this perspective,reliance on moral rules, virtue ethics fits in into the nonconsequentialist ap-proach to ethical decision making. However, the specific moral rule or virtueapplied by the individual depends on the individual’s moral development.“Virtue ethics is based on being, emotion, and reason where one’s actions arean expression of one’s virtues.”139 The individual does not merely apply a ruleor what conventional morality requires, but rather personal judgment is usedto resolve the dilemma.140 That judgment is dependent on the individual’smoral development.

Virtue ethics can be a relevant theory to apply to the bankruptcy deci-sion. The decision to file bankruptcy under this framework will depend onwhat conventional morality requires, what is considered virtuous, and what aperson with “good” moral character would do. Honoring promises to repaydebts is probably a virtue that society would consider moral. A mature personwith “good” moral character would likely embrace that virtue and make adecision that is consistent with that virtue. If honoring promises is consid-ered a virtue, the individual would decide to not file bankruptcy—an actionthat is an expression of the virtue the individual holds. Conversely, if filingbankruptcy is considered acceptable by society, so that the promise to repaydebts is not embraced as a virtue, an individual may accept such a view anddecide to file bankruptcy—an action that is an expression of the virtue (orlack thereof) that the individual holds.

This view of repaying debts as a virtue could be impacted by the indi-vidual’s religious beliefs. Religion can play a role in the moral developmentof the individual. Religion serves as a significant determinant of an individ-ual’s moral code and resulting behavior,141 and an individual’s religious viewsmay impact the decision to file bankruptcy. Many dominant religions stressthe value of repaying debts and, at least, indirectly avoiding bankruptcy.142

This value of honoring debts impacts the moral fabric of individuals who are

137White & Taft, supra note 99, 468.



140Id. at 469.

141Efrat, supra note 45, at 162.

142Id. at 167.


religious, as well as those individuals who are not, to the extent that religiousbeliefs of an individual’s community impact the individual’s decision to filebankruptcy.143

C. Ethical Relativism

Relativism is defined “as the perception of what is right and wrong is based onguidelines and parameters embedded in the social and cultural system.”144

An individual employing ethical relativism uses their personal opinions, so-cietal norms and the circumstances of the situation to “define their ethicalprinciples.”145 Ethical behavior is a subjectively derived from experiences ofthe individual and people around the individual.146 Ethical relativism involvesflexibility in the ethical decision-making process and lets the individual makea decision that lets the individual be part of what is considered the ethicalmajority in society.147 “Ethical relativism allows situations to dictate the wayconduct should be considered.”148

Ethical relativism may be used by an individual debating whether to filebankruptcy. An individual employing the relativist perspective would look toothers to determine what the ethical consensus is on filing bankruptcy.149 Iffiling bankruptcy is not viewed in a negative light by others, then it may beconsidered an ethical act.150 Conversely if it is viewed in a negative way, then

143Id. at 162-63.

144Nhung T. Nguyen et al., Ethics Perception: Does Teaching Make a Difference?, 84 J. Educ. Bus. 66,68 (2008).

145Andrew Ghillyer, Business Ethics Now 7 (2012). See, e.g., Richard Posner, The Problem-atics of Moral and Legal History, 111 Harv. L.Rev. 1637, 1642 (Relativism determines moralityof decisions by considering the “moral code of the particular culture in which the claim isadvanced.”).


147Ghillyer, supra note 145, at 7-8.

148Kimberlee K. Kovach, The Intersection (Collision) of Ethics, Law, and Dispute Resolution: Clashes,Crashes, No Stops, Yields, or Rights of Way, 49 S. Tex. L. Rev. 789, 815 (2008). See also Jennings,supra note 4, at 35 (“[R]elativism. . .establishes moral standards according to the situation inwhich the dilemma is faced.”).

149See, e.g., Efrat, supra note 45, at 154, n.54 (recognizing that societal views of the “moralappropriateness of bankruptcy” may impact the decision to file bankruptcy and that individualswill look to their communities to define what the right course of action is).

150Additionally, the fact that bankruptcy is a legal option may lead some individuals to viewfiling as ethical. This viewpoint equates what is ethical with what is legal. For a discussion of thedistinction between what is legal and ethical, see infra note 167.


filing bankruptcy may be considered unethical. In the bankruptcy contextthe negative view of others on filing bankruptcy is often characterized asstigma.151 Thus, if there is a stigma associated with filing, filing may be viewedas unethical.

D. An Ethical Decision-Making Model for the Bankruptcy Decision

The ethical theories outlined above, while all useful in evaluating ethicaldilemmas, are not without critics.152 It can be challenging to analyze, com-pare, and contrast the theories unless there is an organized framework toguide the decision maker through a particular ethical dilemma. A model canprovide a framework of the ethical decision-making process to aid in teachingethical decision making.153 Several ethical decision-making models have been

151See Rafael Efrat, The Evolution of Bankruptcy Stigma, 7 Theoretical Inquiries L. 365, 367–85 (2006) (providing a historical summary of the development the stigma associated withbankruptcy filing); Christian E. Weller et al., Estimating the Effect of the Bankruptcy Abuse Pre-vention and Consumer Protection Act of 2005 on the Bankruptcy Rate, 84 Am. Bankr. L.J. 327, 327(2010) (discussing the role of stigma in impacting bankruptcy filing rates); Todd J. Zywicki,Institutions, Incentives, and Consumer Bankruptcy Reform, 62 Wash. & Lee L. Rev. 1071, 1096–97 (2005) (explaining the rationale logic behind stigma and how it impacts bankruptcy filingrates).

152Consequentialism, nonconsequentialism, and ethical relativism all have their critics. Conse-quentialist theories are criticized as being too simple in that the focus is on bringing aboutthe most good overall. Samantha Brennan, Moral Lumps, 9 Ethical Theory & Moral Prac.249, 250–52 (2006). Nonconsequentialism, particularly deontology, is criticized for being toorestrictive by not considering the benefits of a particular decision as the consequentialist ap-proaches do. See id. at 250. Ethical relativism is criticized because it permits a determination ofwhat is ethical based on the particular context in which an ethical dilemma is presented so thatwhat is true or ethical is only relatively true or ethical. Aaron Z. Zimmerman, Against Relativism,133 Phil. Stud. 313, 342–43 (2007). The specific ethical theories presented herein have theircritics. For a summary of the shortcomings of utilitarianism, see D.P. Dryer, Utilitarianism, Forand Against, 4 Can. J. Phil. 549, 550-59 (1975) (considering the major writings on utilitarianismand the shortcoming of utilitarianism, particularly the inability to employ utilitarianism in everysituation presented); Edward Harcourt, Integrity, Practical Deliberation and Utilitarianism, 48 Phil.Q. 189, 189–96 (1998) (providing an analysis of the conflict between utilitarianism and actor’svarious commitments). For a critique of egoism, see Machan, supra note 112, at 2-13 (providingdetailed overview of the criticisms of egoism). For an overview of the major criticisms of deon-tology, see Christopher McMahon, The Paradox of Deontology, 20 Phil. & Pub. Aff. 350, 366–68(1991) (reviewing the constraints associated with employing the deontology framework). Virtueethics is criticized because it is viewed by some as part of other ethical theories, such as utilitar-ian and deontology, rather than a separate ethical theory. Martha C. Nussbaum, Virtue Ethics: AMisleading Category?, 3 J. Ethics 163,163. 200–01 (1999).

153Wotruba, supra note 106, at 2.


developed in the business ethics literature.154 A particularly useful model thatis generally accepted as accounting for the ethical decision-making process isthe issue-contingent model of ethical decision making.155 This model can beadapted to guide decision makers as they work through the ethical aspects ofthe bankruptcy decision-making process.

The issue-contingent model is comprised of four stages: (1) recogni-tion of the moral issue, (2) making a moral judgment, (3) establishing moralintent, and (4) engaging in moral behavior.156 The model assumes the de-cision maker proceeds through the steps in sequence. Once the moral issueis recognized, the decision maker moves to stage two. At stage two the de-cision maker makes a moral judgment regarding the ethics of the decision.In making a moral judgment the decision maker looks to the specific ethicaltheories to guide the decision maker on the options available. The decisionmaker then moves to stage three and establishes a moral intent to engage ina particular course of action based on the ethical theories considered in stagetwo. Finally, in stage four the decision maker engages in the moral behavior.

The model assumes that each stage of the process is influenced by the“moral intensity” of the particular issue being addressed.157 Moral intensityis not defined in a simple and uniform way, but rather is comprised of sixfactors or dimensions that are part of all ethical issues.158 The factors providea framework to think about the moral intensity of an issue. The weight orimpact of the factors will vary a great deal, and the overall moral intensity of anissue will depend on how the decision maker views the issue. The factors aremagnitude of consequences, social consensus, probability of effect, temporalimmediacy, proximity, and concentration of effect.159 The magnitude ofthe consequences captures the seriousness of the decision in terms harmor benefit the decision will cause.160 Social consensus captures the degree to

154Id. (collecting various models).

155Russell Haines et al., The Influence of Perceived Importance of an Ethical Issue on Moral Judgment,Moral Obligation, and Moral Intent, 81 J. Bus. Ethics 387, 388 (2008). For a detailed discussionof the model, see id. at 387-90; Eva Hofmann et al., The Decision Process for Ethical Investment, 12J. Fin. Serv. Mkt. 4, 6–8 (2007).

156Haines et al., supra note 155, at 388-89; Hofmann et al., supra note 155, at 6.

157Haines et al., supra note 155, at 388-89.

158Haines et al., supra note 155, at 389; Hofmann et al., supra note 155, at 6.




which society views the act as good or bad.161 Probability of effect refers to theprobability that the act will actually occur and if the harm or benefit expectedwill result.162 Temporal immediacy assesses the time between the decision andthe consequences.163 Proximity is designed to capture the decision maker’s“feeling of nearness” for those impacted by the action.164 The concentrationof the effect refers to the number of individuals impacted by the decision.165

The logic behind incorporating moral intensity in the decision-makingmodel is that the level of moral intensity the decision maker has regarding theissue is expected to impact the decision maker as he or she works through thatparticular stage. For example, in the bankruptcy decision-making process ifthe decision maker does not have any particular moral intensity regardingfiling, then the decision maker at the first stage, recognition of the moralissue, may not view filing bankruptcy as a moral or ethical issue at all. If that isthe case, the decision regarding filing bankruptcy would be made without anyconsideration of the ethical ramifications. However, if the decision maker hassome degree of moral intensity with the decision to file bankruptcy, then themagnitude of that intensity based on the various factors comprising moralintensity, may lead the decision maker to view the decision as an ethical ormoral issue. Then the decision maker would move through the stages of themodel with moral intensity impacting the decision maker at each stage.

Figure 1 is an adaptation of the issue-contingent ethical decision-makingmodel166 that can be used to guide a decision maker through the bankruptcydecision-making process. At stage one it must be determined if the decisionto file or not file bankruptcy is actually an ethical or moral decision at all.Assuming the bankruptcy decision is recognized as an ethical or moral issue,then the decision maker moves to stages two and three. The ethical theo-ries that are relevant to the bankruptcy decision are included in Figure 1under stages two and three. It is at these two stages, making moral judgment

161Haines et al., supra note 155, at 389; Hofmann et al., supra note 155, at 6-7.





166For a comprehensive treatment of the issue-contingent model, see Thomas M. Jones, EthicalDecision Making by Individuals in Organizations: An Issue-Contingent Model, 16 Acad. Mgmt. Rev.366, 378–389 (1991). See also supra, text accompanying notes 155-65.


Figure 1: Ethical Decision-Making Model for Bankruptcy

and establishing a moral intent, in which the decision maker considers theethical theories and decides on a course of action. Finally, in stage four thedecision maker engages in moral behavior, either filing bankruptcy or notfiling bankruptcy. At each stage the process, the moral intensity, based onthe various factors that comprise it, will impact the decision maker.

V. The Case Study: John in Financial DistressA. The Case Study

John is fifty-eight years old and lives in rural Mississippi. He is married andhas one adult daughter in college. John has been very successful in severalbusiness ventures, but with the downturn in the economy, he finds his busi-ness interests quickly on the demise. The businesses are all separate legalentities, but as have many small business owners, John guaranteed many of


the business debts. With the businesses all but shut down and without fundsto meet their obligations, creditors of the businesses are now turning to Johnon the guarantees they have. Several creditors, including several banks, havesued John and obtained default judgments for the obligations and are aboutto attempt to collect those debts from John. John also has failed to pay hisbusinesses’ sales taxes to local and state authorities, as well as the businesses’employee withholding taxes to the Internal Revenue Service (IRS).

John has accumulated substantial wealth ($1.5 million) in creditor pro-tected retirement accounts. All other valuable assets, including the familyhome, valued at $600,000, a boat, a car, and other items are owned by John’swife. John is judgment proof, in that he has no assets that creditors can use tosatisfy his debts. However, John’s future wages may be subject to garnishmentby creditors. Garnishment is a process by which creditors can obtain a courtorder to take property, such as a percentage of John’s wages, to satisfy a debt.

John has found a job consulting. and he nets $7,000.00 per a month. Hecontributes these funds to household expenses since his wife recently retiredand only earns a small state pension. When John pays the mortgage paymenton the family home and other household obligations, such as maintaininghis boat, paying for his daughter’s living and college-related expenses, he hasvery little excess income at the end of the month to repay his creditors.

John has sought the advice of a prominent bankruptcy law firm. Twopartners met with John. The partners advised John that even with the newbankruptcy laws, he can file for Chapter 7 bankruptcy protection and bedischarged of most of his debts. The partners advised John that althoughlegally bankruptcy would be a viable option, that if he reduced some of hisdiscretionary expenditures, he could pay about 50 percent of his generaldebts. They further advised John that they could likely negotiate with the IRSand reduce his tax liability to a manageable amount.

John does not know what to do. He likes the idea of obtaining a dis-charge of his debts and getting a fresh start under bankruptcy law. However,John questions whether he should use the bankruptcy process when he couldactually work out a way to repay a substantial portion of his debts. John’s de-cision impacts not only him, but also his family and creditors.

B. Discussion Questions

1. Who are the stakeholders in John’s situation and what priority rank doyou give each stakeholder?


2. Incorporating specific ethical theories, make John’s case that he shouldfile for Chapter 7 bankruptcy relief. Consider the role of law in thedecision-making process.

3. Incorporating specific ethical theories, make John’s case that he shouldnot file for Chapter 7 bankruptcy relief. Consider the role of law in thedecision-making process.

4. Assume that John’s local newspaper publishes the names of all individualswho file bankruptcy in the Sunday edition. How will that policy impactJohn’s decision? Explain.

VI. Teaching NoteA. Learning Objectives

The case provides an opportunity to identify and employ ethical theories indecision making, while considering all stakeholders impacted by the deci-sion. It also provides an example to students of how ethical decisions oftenencompass more than the law requires or permits.167 John can fulfill thelegal requirements for filing under Chapter 7 of the Bankruptcy Code, butthe ethical parameters he establishes for himself will guide him on whetherto file or not. The specific learning objectives are as follows:

167See Lampe, supra note 11, at 11 (recognizing that being ethical requires doing more thanthe law requires or doing less than the law allows). See also Lynn Sharp Paine, Law, Ethics,and Managerial Judgment, 12 J. Legal Stud. Educ. 153, 154–62, 169 (1994) Paine provides adetailed review of the two divergent schools of thought on whether law and ethics are separateand distinct standards or whether law and ethics are coextensive, the separate realms view andcorrespondence view. Paine asserts that responsible business management may require muchmore than mere compliance with the law. Recognition of the distinction between what is legaland ethical is important in making ethical decisions. When rules, or laws, become the ceiling forwhat is acceptable behavior rather than the floor, ethics and rules become blurred. Michael L.Michael, Business Ethics: The Law of Rules, 16 Bus. Ethics Q. 475, 476–77 (2006). The blurring oflaw and ethics or failing to recognize the distinction between law and ethics can potentially lead toproblematic results. See Lynn Sharp Paine, Managing for Organizational Integrity, Harv. Bus. Rev.,Mar.-Apr. 1994 at 106, 109 (“’If it’s legal, it’s ethical,’ is a frequently heard slogan. But conductthat is lawful may be highly problematic from an ethical point of view.”). Such problematicresults can be seen by considering laws that required racial segregation or discrimination. Toabide by the law would lead to unethical or immoral behavior. Thomas W. Dunfee, The World IsFlat in the Twenty-First Century: A Response to Hasnas, 17 Bus. Ethics Q. 427, 429 (2007). Whenindividuals are faced with ethical dilemmas the decision needs to “move beyond the confines of‘legal’ to the realm of ‘ethical.’” Michael, supra at 497. In order to move into the realm of ethicalin decision making, the decision maker must recognize that the law in the baseline or minimalstandard of behavioris acceptable—the floor rather than the ceiling.


1. Identify relevant ethical issues.2. Employ ethical theories in decision making, while considering stakehold-

ers’ interests.3. Distinguish between legal and ethical decision making.

B. Potential Uses of the Case

The case involves several of the topics to be covered in business educationas set forth by the Association to Advance Collegiate Schools of Business(AACSB) such as individual ethical behavior and the “political, economic,legal and regulatory context for business.”168 Case studies, such as the onepresented herein, are recognized as way to enhance the “development ofethical legal reasoning skills.”169 Beyond ethics, with some modification, thecase can be used effectively to explore the legal aspects of bankruptcy, theunderlying policy behind bankruptcy law in the United States, as well as thepolitical, economic and regulatory environment of business.

The case can be employed in a variety of courses, but would fit bestin courses that address both ethics and bankruptcy such as business lawcourses and the legal and social environment course. The typical businesslaw course and the legal and social environment course have some overlapin topics, but the treatment of substantive law, such as bankruptcy, is usuallynot as detailed in the legal and social environment course.170 The case aspresented here, with an emphasis on ethical considerations rather than onsubstantive bankruptcy law, would work particularly well in a legal and socialenvironment course that only provides a cursory treatment of substantivebankruptcy law. The case can be used in a business law course where substan-tive bankruptcy law is likely to receive more treatment than the typical legaland social environment course. The case can serve as a springboard to move

168AACSB International, Eligibility Procedures and Accredita-tion Standards for Business Accreditation, at 70 (2011), available athttp://www.aacsb.edu/accreditation/business/standards/.

169Saunders, supra note 16, at 240.

170See, e.g., Carol J. Miller & Susan J. Crain, Legal Environment v. Business Law Courses: A DistinctionWithout a Difference?, 28 J. Legal Stud. Educ. 149, 182–87 (2011). This article provides ananalysis of the topics covered in the business law course and legal and social environment courseat AACSB-accredited universities. The findings show that there is considerable overlap of thetopics covered in each course, but the business law course includes a more detailed treatmentof certain substantive areas of the law such as agency, property, contracts, torts and businessorganizations.


beyond ethical aspects of the bankruptcy decision, to explore some of thepolicy and substantive aspects of bankruptcy law that an instructor wishes toemphasize.

C. Discussion of the Assigned Case Questions

1. Who are the stakeholders in John’s situation and what priority rank do you giveeach stakeholder? Stakeholders include any person or entity that will be im-pacted by John’s decision. The primary stakeholders include John’s familyand his creditors. Beyond the primary stakeholders, the local, state and U.S.governments, as well as other taxpayers, are stakeholders. The failure to payrequired taxes or withholdings impacts the all taxpayers. The pool of fundsavailable to fund vital government functions are reduced, and revenues willhave to be raised in other ways. If John does not pay his obligations to thelocal, state, and U.S. governments, it can have a substantial impact when it isaggregated with others that fail to pay their tax obligations.

The priority ranking of stakeholders will vary depending on the appli-cable ethical framework employed in the decision-making process. If utilitar-ianism is employed with an emphasis on maximizing social utility, the priorityrank from highest to lowest would be taxpayers; local, state, and U.S. govern-ments; John’s creditors; and his family. Conversely if egoism is the frameworkemployed with an emphasis on the self-interest of the decision maker, thepriority rank from highest to lowest would be John’s family; John’s creditors;local, state,and U.S. governments; and taxpayers. Under a nonconsequen-tialist approach, the emphasis will not be on the impact on the particularstakeholder, but rather on the morality of process or means to an outcome.

If ethical relativism is employed, the ranking of the stakeholders will varydepending on the particular view the decision maker has of filing bankruptcy.If it is viewed in a negative way, the priority rank would likely be taxpayers;the local, state, and U.S. governments; the creditors; and lastly John’s family.However, if the decision maker does not view bankruptcy in a negative light,the priority of the stakeholders may be on John’s family; his creditors; local,state, and U.S. governments; and then taxpayers.

2. Incorporating specific ethical theories, make John’s case that he should file forChapter 7 bankruptcy relief. Consider the role of law in the decision-making process.John should file for Chapter 7 relief and obtain debt forgiveness. This deci-sion can be supported by reliance on several ethical theories. The specificethical theory employed will depend on the assumptions made regarding themoral intensity that John has regarding the bankruptcy decision.


Utilitarianism focuses on the common good or maximizing social utility.If John files for bankruptcy, it will provide an opportunity to effectively dealwith his debts so that all creditors are treated in a uniform and fair mannerunder bankruptcy law. John will also receive a discharge of debts and freshstart. Both the treatment of creditors and the fresh start to John can be viewedas promoting a common good or maximizing social utility. If individuals areburdened by debt forever, it hampers their ability to engage in financialendeavors and be productive members of society. Likewise, creditors needa mechanism to effectively address outstanding obligations in a fair anduniform way.

Egoism focuses on the self-interest of the decision maker, and decisionsshould be made that result in the most favorable consequences for the de-cision maker. For John, by filing for bankruptcy relief, he will achieve themost favorable result for him and his family—a discharge of his debts. Anyother decision will impact John’s wealth and ability to maintain his lifestyleand that of his family.

The viewpoint that law and ethics are coextensive, rather than separaterealms, can be used to justify the filing as ethical. The slogan “if it’s legal,then it’s ethical” could be applied to the filing bankruptcy decision. Johncould argue that he is simply availing himself of the relief available underthe law and has been provided legal advice that filing is permitted. Thedifficulty with employing this position is that simply because something islegal does not necessarily mean it is ethical. Law and ethics are separaterealms. For example, adhering to laws requiring racial discrimination doesnot mean that discrimination is ethical. In the bankruptcy context, if Johnhas an ability to repay his debts, the fact that he can file bankruptcy from alegal perspective does not mean that filing is ethical.

3. Incorporating specific ethical theories, make John’s case the he should notfile for Chapter 7 bankruptcy relief. Consider the role of law in the decision-makingprocess. John should not file for Chapter 7 bankruptcy. This decision can besupported by several ethical theories. The specific ethical theory employedwill depend on the assumptions made regarding the moral intensity that Johnhas regarding the bankruptcy decision.

John may rely on utilitarianism to support a decision to not file. Fil-ing bankruptcy may actually harm others in society and not produce thegreatest good. If John files, he does not honor his obligations, and this willimpact his creditors. The costs and losses caused by John will be passed on toother customers of the creditors through increased fees and higher interestrates.


Nonconsequentialist theories, such as formalism, will guide John awayfrom choosing to file bankruptcy. There are certain acts that are right orwrong in and of itself. Filing bankruptcy and obtaining a discharge of debts,when John has the ability to repay a substantial portion of his creditors,likely is a wrong in and of itself when viewed from the formalism vantagepoint.

Likewise, Kant’s categorical imperative would lead John to choosingnot to file bankruptcy. If everyone in John’s position filed bankruptcy ratherthan repaying debts that can be repaid, this would lead to problems in thelending industry and limit the availability of funds. John would not want auniversal principle in place so that everyone in his position filed bankruptcy.John would want an exception for himself, and, therefore, the decision tofile bankruptcy would be unethical.

Virtue ethics can also be used to support a decision to not filebankruptcy. John is debating whether to file or not, and this indicatesthat something about the decision to file is bothering John. Virtue ethicsis based on what an individual with “good” moral character would chooseto do. The hesitation that John has about filing may lead to a judgmentthat filing will run counter to what John considers a virtue—honoring one’sobligations.

Even though John could justify filing from a legal perspective, simplybecause it is legal to file for Chapter 7 relief does not mean it is right or moral.John can support his decision to not file by recognizing that law and ethicsare separate realms, rather than coextensive. Ethical standards are oftenhigher than legal standards. If John relies on the ethical theories outlinedabove, then he will not let the permissive nature of bankruptcy law guide hisdecision. John will opt for the higher ethical principle to guide him. Johnwould opt for the higher ethical principle of repaying his obligations eventhough bankruptcy law would permit him to not repay his obligations.

4. Assume that John’s local newspaper publishes the names of all individualswho file bankruptcy in the Sunday edition. How will that impact John’s decision? Ex-plain. If John relies on consequentialist ethical theories such as utilitarianismand egoism, as well as the permissive nature of bankruptcy law, so that he isleaning toward filing bankruptcy, the publicity of filing may be an overridingdeterminative factor in his decision-making process. The publicity in effectmagnifies the moral intensity that John has regarding filing by highlightingthe social consensus on filing bankruptcy and increasing the proximity of hisdecision on others.


Whether the publicity will impact John’s decision depends on whetherhe views bankruptcy status in a negative light. Some individuals may associatea stigma with filing bankruptcy. The degree of that stigma may result in Johnnot filing bankruptcy, even if from an ethical perspective he can justify thedecision. The moral intensity may increase to such an extent that it impactshis decision.

D. Evaluation

The case study has been used in the author’s legal and social environmentcourse and his business law course. The legal and social environment coursewas in a traditional classroom setting, and students were assigned the casestudy and were required to submit written answers via Blackboard. The in-structor graded the written responses and provided feedback via Blackboardprior to the class meeting where the case study and discussion questions werediscussed. At the face-to-face class meeting, students were divided into twogroups, with one group taking the position that John should file bankruptcy,and the other taking the position that he should not. Based on the participa-tion and relevant use of ethical theories to support each position, the groupwas given a grade. The written individual response counted for 80 percent ofa student’s grade on the assignment, with the group grade counting for theremaining 20 percent.

The business law course was an online class via Blackboard. The casestudy was posted on Blackboard as an individual assignment, and studentswere required to submit their written answers. The instructor graded thewritten responses and provided feedback to each student via Blackboard.The instructor then posted two additional discussion questions171 on a Black-board discussion board. Each student was required to post at a minimumtwo substantive responses in the discussion of those additional questions.The written individual response counted for 80 percent of a student’s gradeon the assignment, with the discussion board participation counting for theremaining 20 percent.

171The two questions added wrinkles to the four initial questions and were designed to promotea lively discussion. The questions were: 1. Assume all of John’s creditors are national in scopeand that he has no personal relationship with the creditors at all. How will this impact John’sdecision to file or not file for Chapter 7 bankruptcy relief? 2. Assume John is a very religiousman and places a great emphasis on honoring his word. How would this impact John’s decisionto file or not file for Chapter 7 bankruptcy relief?


A grading rubric was developed for evaluation of the assignment inthe face-to-face course and the online course. The applicable rubric wasprovided to students in both courses at the time they were provided withthe case study.172 Providing the rubric prior to the assignment helps targettheir efforts and helps guide them in working through the case study.173

The grading rubric allows the instructor the opportunity to provide moredetailed feedback to students than merely providing a letter grade for anassignment.174

VII. Conclusion

Anecdotal evidence indicates that the case study objectives were met. Thewritten submissions in both courses showed that the majority of studentswere able to appreciate and recognize the ethical issue that John was pre-sented with. Most students were able to employ ethical theories to supportJohn’s position and appreciated how John’s decision had a substantial impactbeyond him. The distinction between the ethical and legal components ofthe decision John had to make was evident from the written answers andthe class discussions. The discussion in the fixed classroom, as well on thediscussion board, helped the students explore other factors, such as religiousbeliefs and stigma, in the analysis.

Both the economic downturn and the continued high incidence ofconsumer bankruptcy in recent years created the impetus for a case studycentered on consumer bankruptcy. This, coupled with the continuing effortto enhance individual ethical decision-making training in business schools,

172For examples of excellent grading rubrics that can be used as models for developing gradingrubics for this and other assignments, see Ida M. Jones, Can You See Me Now? Defining TeachingPresence in the Online Classroom Through Building a Learning Community, 28 J. Legal Stud. Educ.67, 105,115–16 (2011); Anne Tucker Nees et al., Enhancing the Educational Value of ExperientialLearning: The Business Court Project, 27 J. Legal Stud. Educ. 171, 207 (2010); Regina M. Robson,An Entrepreneurial Stand in the Business Law Course: The Ice Cream Project, 26 J. Legal Stud. Educ.433, 454 (2009); Susan Willey & Peggy Sherman, Mining for Gold: Utilizing SEC Filings to DevelopMBA Students’ Understanding of Legal Concepts, 27 J. Legal Stud. Educ. 321, 333 (2010).

173See Pagnattaro, supra note 10, at 197 (recognizing the value in providing students informationon how they will be graded prior to submission of the assignment).

174For a discussion of the benefits of using a grading rubric, see Debra D. Burke et al., The Twenty-First Century and Legal Studies in Business: Preparing Students to Perform in A Globally CompetitiveEnvironment, 27 J. Legal Stud. Educ. 1, 31 (2010); Willey & Sherman, supra note 172, at 332.


warranted the development of a case study that incorporates both consumerbankruptcy and ethical decision making. The case study not only offers theopportunity to educate students on the basics of consumer bankruptcy, butit offers an opportunity for applied learning in the realm of ethics. The hopeis that this case study will actively engage students by having them reflecton their own personal ethical beliefs to resolve this hypothetical, yet timely,ethical dilemma.

Documents

Ethical Considerations in Filing Personal Bankruptcy: A Hypothetical Case Study