Welcome back to the Deep Dive. Today we are plunging
headfirst into a subject that manages, well,
the greatest financial failures in the world.
Everything from global shipping empires all the
way down to a single household just struggling
with medical bills. We are talking about... bankruptcy.
And right off the bat, we have to clarify what
it actually is. We do, because people use it
all the time as a synonym for insolvency. And
they are absolutely not the same thing. That's
the critical starting point for this whole discussion,
isn't it? It is. Insolvency is just a state of
being. You know, you can't pay your debts. You're
broke. Your company's underwater. It's an economic
condition. Exactly. But bankruptcy is the legal
status. It's a specific court -ordered process
that allows an insolvent person or a company
to seek relief. It's the formal mechanism for
dealing with being broke. OK, a legal tool, not
just a financial state. And to get started, the
name itself has this surprisingly dramatic, almost
physical origin story. It really does. It sets
the tone perfectly for the brutal history of
debt. The word comes from Italian. Banca rotta.
Banca rotta. Literally, a broken bank or a broken
bench. And the story behind that is incredible.
It supposedly comes from Renaissance Italy. That's
the tradition, yeah. In places like Venice and
Florence, the early bankers and money changers
would work from a simple bench, a bunca, in the
public square. And the story goes, even if it's
a bit of a legend, that if a banker defaulted
and couldn't pay his debts, his bench would be
physically smashed. Rota. Broken. Wow. So it
wasn't just a notice in the paper. It was a public
physical act of destruction. A total public shaming.
It was a visual metaphor that told everyone your
financial life was over. And that really sets
the stage for our mission today. Right. We're
going to track that journey from, well, from
that kind of brutal punishment. All the way to
the highly structured rehabilitation -focused
laws we have today. We'll look at global differences,
the complex U .S. chapters, and that very fine
line between a smart legal strategy and outright
criminal fraud. And that's the tension that runs
through all of this, isn't it? How do you balance
the rights of the person who is owed money with
the need to give an honest debtor a fresh start?
To really get why rehabilitation is such a big
deal now, we have to look at what people were
being rehabilitated from. So let's go way back
thousands of years to ancient Greece. In ancient
Greece, failing to pay your debt wasn't just
about losing assets. It was about losing your
freedom. What do you mean? Well. There was no
concept of a fresh start. If you couldn't pay,
your creditor had the legal right to seize you,
your wife, your children, even your servants,
and force you into debt slavery. So you repaid
your debt with years of your life, with forced
labor. Exactly. Your body became the collateral.
But even then, there was some early sort of legal
limits. Detections. In a way. In many Greek city
-states, debt slavery was often capped maybe
at five years. And these debt slaves had certain
protections for their life and limb that, you
know, a regular slave captured in war might not
have had. But I remember reading there was a
really dark loophole to that. There was. While
you, the debtor, might be protected for five
years, your servants, or even your own children
who were seized with you, could sometimes be
kept by the creditor for much longer. For a lifetime.
Sometimes, yes. Under much harsher conditions.
It was a way to get around the limits on the
original debt. That's just appalling. But there
was one huge exception to this rule, a place
that did things differently. Athens. Absolutely.
Yeah. This is a key moment in legal history.
Under the laws of Solon, back in the early 6th
century BC, enslavement for debt was forbidden.
What did they call it? The Sicephia. It means
the shaking off of burdens. It was revolutionary.
Let's just pause on that. What principle did
that establish by saying you can't enslave a
citizen for debt? He established that a citizen's
personhood was more important than a creditor's
property rights. Your body was off limits as
collateral. Which had a huge practical effect.
It meant that most of the slaves in Athens were
foreigners because their own citizens were legally
protected from that fate. A huge shift. It's
an early sign that society might be better off
not... completely destroying a citizen over a
debt. But that severity didn't just disappear.
Let's jump forward. The first formal English
law doesn't show up for a long time. Right. Not
until 1542, under Henry VIII, the statute of
bankruptcy. And even then, it was very punitive.
It was aimed more at punishing fraudulent merchants
than offering any kind of relief. So still creditor
-focused. Very much so. But if you think that's
tough... You have to look at the laws of Genghis
Khan, the Yasa. Oh, I've heard about this. It
makes the English law look incredibly gentle.
The Yasa had a provision that it mandated the
death penalty for anyone who went bankrupt three
times. Death. For failing financially three times.
Death. It tells you that financial failure wasn't
seen as a misfortune. It was seen as a deep societal
weakness, a crime against the market order. The
goal was deterrence through elimination. No second
chances there. Let alone a third. And it's not
just individuals. Entire nations can fail. Sovereign
defaults. Right. And this is fascinating because
there's no global bankruptcy court for countries.
But it has happened over and over again throughout
history. And a prime example comes from Spain's
golden age. Philip II of Spain. He was one of
the most powerful rulers on Earth, with an empire
flowing with silver and gold from the Americas.
And yet. He declared state bankruptcy four times.
In 1557, 1560, 1575, and 1596. How is that even
possible with all that wealth? How do you go
bankrupt four times? War. Constant, incredibly
expensive wars against the Ottomans and the Netherlands,
the Spanish Armada. The cost of empire just outstripped
his income. When the interest on his loans got
too high, he just stopped paying. Which must
have frozen credit markets across all of Europe.
Every single time. It just goes to show that
no one is immune to overextension. And while
a state doesn't get liquidated like a company.
The consequences can still bring it down. Exactly.
The economic chaos can be the final straw. A
great example is the Sui dynasty in China. After
their war in 614 A .D. Yes. The Guguryeo -Sui
War. It was a disaster. The cost was so immense
it led to hyperinflation, forced labor, famine.
So the financial strain was the root cause. It
completely destroyed the system's legitimacy.
The dynasty collapsed within four years. So even
without a formal court ruling, financial failure
can absolutely be the catalyst for state collapse.
That history is just, it's brutal. From debt
slavery to execution. So the modern era really
is a complete philosophical reversal. It's a
massive shift. The main goal of modern insolvency
law, especially for businesses, is no longer
about punishment or elimination. It's about preserving
value. Precisely. There was this huge economic
realization that just liquidating an insolvent
company... often destroys more value. You lose
jobs, you lose production, intellectual property
than if you try to save it. So the law's goal
changed from punishing the failure to enabling
survival. Right. The goal is now to remodel the
company's financial and organizational structure.
You ought to rehabilitate it to help it continue.
Liquidation is the last resort, not the first
step. And that philosophy gets even more important
when we talk about, you know, private households.
It's about human recovery. Exactly. For individuals,
it's not just a get out of debt free card. It's
about figuring out the underlying problem. It
was a medical emergency, a job loss, poor financial
literacy. And then trying to fix it so it doesn't
happen again. Right. And that requires integrated
support. You see this a lot in the European context.
What does that support look like? It means things
like mandatory debt advice, supervised periods
where your spending is monitored, financial education
classes, and even social help to try and stabilize
your income. So it's a very active process. You
have to participate in your own recovery. You
do. Most EU member states require you to make
some partial payments and follow behavioral rules
to get your debts discharged. But there's a huge
range. The UK is probably the closest to the
US model, which is more focused on a clean slate.
And what's on the other end of that spectrum?
A country that's much more restrictive. Spain
is a great example. Their 2003 law, the like
and concurs, allows for debt settlement plans.
You can get more time to pay. maybe up to five
years, or you can get your total debt reduced
by up to half. Up to half. So you could go through
this whole process and still owe 50 % of what
you originally did. Yes. And crucially, the Spanish
law does not foresee a full debt discharge. That
remaining balance doesn't just go away. You still
owe it. Wow. So it's about making the debt manageable,
not eliminating it. Exactly. It keeps the debtor
accountable. but it means they could be carrying
that debt for life. Speaking of debt you can
carry for life, we have to talk about the elephant
in the American room. Student loans. Student
loans. They are notoriously almost impossible
to get rid of in bankruptcy in the U .S. They
are. It really goes against that whole fresh
start philosophy. The reason they're carved out
is that there was this fear initially that new
graduates like doctors and lawyers would just
file for bankruptcy right away and wipe out all
their loans. Okay, I can see the logic there.
But the law has gotten so tight over the years
that now the hurdle is incredibly high. It's
defined by something called the Brunner test.
And this isn't a simple math problem. You have
to prove three separate, very difficult things
to the court. That's right. All three. And the
first one is just proving you're in dire financial
straits. So factor one is that if you had to
repay the loan, you couldn't maintain a minimal
standard of living. Right. Not that it would
be hard, but that you literally could not afford
basic food, shelter and health care. The very
high bar. OK, so that's the first hurdle. What's
the second? The second is that you have to prove
this situation is likely to be permanent, that
your financial problems will probably continue
for most or all of the repayment period. So you
basically have to prove to a judge that your
future is hopeless. It sounds bleak, but that's
essentially it. You have to show something like
a permanent disability or a situation that will
never let you earn enough. A temporary job loss
usually isn't enough. You're arguing you'll never
recover financially. Yes. And then the third
factor is about your past actions. You have to
show you've made a good faith effort to repay
the loans before filing. You do. You can't have
just ignored the debt for 10 years. You need
to show you tried to work with the lender, maybe
get on a payment plan, ask for deferment. And
even if you managed to prove all three of those
things, destitution, permanence and good faith.
The court might still only grant you a partial
discharge. It's incredible. It just shows how
protected that specific type of debt is in the
system. All right. So we've gone from the legal
difficulties of the Brenner test to, well, outright
criminality, because this whole system depends
on people being honest. And where there's a chance
for a fresh start, there's always an opportunity
for fraud. Bankruptcy fraud is a major white
collar crime. At its core, it's about deceit,
right? lying to the court or to your creditors.
Usually by hiding assets to stop them from being
seized and sold. But it can also be filing false
information, filing in multiple states at once,
or even bribery. And because this is all happening
in a federal court system in the U .S., any lie
can be prosecuted as a federal crime. Exactly.
It's perjury. The U .S. statutes focus on whether
the person knowingly tried to deceive the system.
And the most common way people fall into this,
what you call the concealment trap, is by not
listing assets they think are worthless. This
is such a critical mistake. People think, oh,
my old car doesn't run or this collection of
stamps is just junk. I don't need to put it on
the forms. And that's a huge problem. A catastrophic
one. Because you are legally required to disclose
everything. It's not your job to decide what
an asset is worth. Whose job is it? It's the
job of the trustee, the person the court appoints
to represent your creditors. They get to decide
if that broken -down car has valuable parts or
if one of those stamps is a rare collectible.
By leaving it off, you've committed fraud. So
walk me through what happens. Let's say someone
hides a valuable painting, gets their debts discharged,
and then a year later, a creditor finds out about
it. The trap snaps shut. A creditor, or the U
.S. trustee, can ask the court to reopen the
case. The trustee will seize that painting and
sell it. And the debt. The discharge of debt
the person received can be revoked. So all that
debt comes flooding back. And on top of that,
they can now face federal prosecution for fraud
and perjury. The lesson is disclose everything.
Absolutely everything. The system demands total
transparency. Now, that's criminal fraud. But
we need to make a clear distinction between that
and something called strategic bankruptcy. Which
is completely legal. Strategic bankruptcy isn't
about hiding things or lying. It's about using
the bankruptcy laws to your best advantage. So
you're genuinely in financial trouble, but you're
timing your filing or using a specific chapter
to get the best possible outcome. Exactly. An
example of fraud would be, you know, moving all
your cash to an offshore account a month before
you file. Right. An example of strategy would
be a large corporation filing for Chapter 11,
specifically so they can legally get out of some
very expensive long -term contracts or leases
that are sinking the business. It's aggressive,
but it's playing by the rules. It's using the
law as it was written. It's a tool, not a crime.
Now, as we look around the world, one of the
first things you notice is that the word bankruptcy
itself can mean different things, can't it? It
can. And the biggest difference is whether you're
talking about a person or a company. Okay, so
in places like the UK, Australia, Ireland, and
Finland. The term bankruptcy is reserved strictly
for individuals. Only a person can be declared
bankrupt. So if a big company in London goes
under, what's it called? They go into liquidation
or administration. They use corporate insolvency
procedures. But you'll never hear a news report
say a British company has gone bankrupt. It's
just not the right legal term. But that's the
complete opposite of the North American model.
Right. In the U .S. and Canada, the word bankruptcy
is used much more broadly. It applies to insolvency
proceedings for both people and businesses. That's
why you hear about a company filing for Chapter
11 bankruptcy. Let's put a spotlight on Australia,
which follows that individual -only model. How
does it work there? It's all governed by a federal
law, the Bankruptcy Act 1966. And you can end
up in bankruptcy either voluntarily or involuntarily.
Involuntarily. A creditor can force you into
it. They can. If you owe a creditor at least
$5 ,000 from a court judgment and you don't pay,
they can ask the court to issue a sequestration
order, which legally makes you bankrupt. And
what about if you do it yourself? You file a
debtor's petition with the Australian Financial
Security Authority, or AFSA. You have to provide
a detailed statement of affairs listing everything
you own and owe. And how long does it last? A
standard bankruptcy in Australia lasts for three
years from the day you file that statement. During
that time, a trustee is monitoring you. And that
monitoring seems pretty intense. It is. A key
difference from other systems is the control
over your travel. Wait, what? If you are bankrupt
in Australia, you need to get written permission
from your trustee to travel overseas. If you
try to leave without it, the federal police can
stop you at the airport. That is a serious restriction
on your personal freedom. It is. It's designed
to make sure you comply and don't try to hide
assets abroad. And if you don't comply with other
things, like making required income contributions...
There are consequences. The trustee can object
to your discharge, which can extend your bankruptcy
for another... three or even five years. It's
a big deal. And like in the U .S., some of your
assets are protected. They're exempt. Yes. Things
like basic household goods, tools you need for
your job, and a car up to a certain value are
protected. But anything else, like equity in
a home, can be sold by the trustee. Can you get
out of the three years early? You can. It's called
an annulment. The easiest way is to pay all your
debts in full. More commonly, you can make an
offer of composition to your creditors. A settlement
offer. Exactly. You offer to pay a certain amount,
say 50 cents on the dollar. If enough of your
creditors agree, you pay that amount and your
bankruptcy is annulled early. Okay, that's Australia.
Now, the Netherlands has a very different, very
structured system. It's very clear. The Dutch
bankruptcy code has three separate proceedings
depending on who you are and what the goal is.
So what's track one? That's filisme. It translates
as bankruptcy. And it's only for companies. And
his only goal is liquidation, winding the company
up. So that's like a corporate Chapter 7, Track
2. This is also only for companies. And it's
their reorganization tool. It's like Chapter
11, giving the company protection from creditors
so it has time to restructure. And the third
track must be for individuals. Right. It's called
schuldzentering. or debt reorganization. It's
a court ruled process where a judge appoints
an independent monitor to basically take over
the person's finances and supervise everything
during the repayment plan. That sounds intense,
but it's different from the Australian model.
It is. While you lose your financial autonomy
in the Dutch system, you don't have those same
punitive restrictions on travel. It just reflects
a different philosophy of enforcement. These
global differences really show how complex this
all is. But now we have to dive into arguably
the most intricate and influential system in
the world. The United States Bankruptcy Code,
Title 11 of the U .S. Code. And this isn't just
some law Congress passed. This power is written
right into the U .S. Constitution. It is. Article
1, Section 8 gives Congress the power to establish
uniform laws on the subject of bankruptcies.
The founders recognized that this was a national
issue that needed a consistent federal approach.
But, and this is a huge but, even though it's
a federal law, state law plays an enormous role.
a decisive role, especially when it comes to
exemptions. And exemptions are the list of property
that you're allowed to keep that the trustee
can't take and sell. Exactly. And Congress decided
to let the state set most of their own exemption
laws, which means there's massive variation from
state to state. Which can lead to wildly different
outcomes for people in pretty similar situations,
just depending on where they live. Absolutely.
The classic example is a homestead exemption,
which protects the equity in your home. States
like Texas and Florida have, generally speaking,
an unlimited homestead exemption. You can protect
a very valuable home. While other states are
much more limited. And even neighboring states
can be different. Maryland lets you protect the
first $6 ,000 of property or cash. Right next
door, Virginia's exemption is typically $5 ,000.
That extra $1 ,000 can make a huge difference
if you're trying to start over. So state law
determines what you keep. But the moment you
file, the most powerful protection of all kicks
in, and it's purely federal. The automatic stay.
The instant shield. It is. It applies to every
kind of filing, 7, 11, or 13, and it happens
immediately. The second your petition is filed
with the court, a legal stay goes into effect
that stops almost all collection activity. What
does it stop, specifically? It stops lawsuits,
repossessions, foreclosures, evictions, wage
garnishments, harassing phone calls, collection
letters. It's designed to give you immediate
breathing room. It's the big red pause button.
It is. And once that shield is up, you proceed
under one of the main chapters. Let's start with
the most common one for individuals, Chapter
7. Straight liquidation. This is the quickest
and simplest form, usually over in four to six
months. The goal is to eliminate unsecured debt
credit cards, medical bills, personal loans.
You surrender your non -exempt property, the
trustee sells it, and you get a discharge. But
not everything gets discharged. We know student
loans usually survive. Right. And so do things
like child support, alimony, recent tax debts,
and fines from criminal cases. Those are seen
as debts to society or family. that you can't
just wipe away. And you can't just choose to
file Chapter 7. You have to qualify. You have
to pass the means test. The means test is a controversial
and very complex hurdle that was put in place
in 2005. The idea was to stop higher income people
from using Chapter 7 and force them into a repayment
plan instead. How does it work? What's step one?
Step one is simple. The court looks at your average
income for the six months before you filed and
compares it to the median income for a family
of your size in your state. If your income is
below that median, you pass. You can file chapter
seven. And if you're above the median. Then you
go to step two, which is much more complicated.
You have to do a disposable income calculation.
And this is where it gets tricky. Very tricky.
You start subtracting your monthly expenses.
But this is the key part. You have to use national
and local standard expense amounts set by the
IRS, not necessarily what you actually spend.
So wait. Even if my rent is $2 ,500 a month,
the IRS standard for my area might only be $1
,800, and that's the number I have to use. That
is exactly right. The test is designed to be
tough. After you subtract all those standardized
expenses, if you have more than a certain amount
of disposable income left over, you fail the
test. And you're forced into a repayment plan.
You're presumed to have the ability to pay something
back, so you'll have to file Chapter 13. OK,
so that's the consumer liquidation path. What
about the big businesses, the lifeline for corporations?
That's chapter 11. This is the gold standard
for corporate reorganization. It allows a business
to keep operating while it restructures its debts
and tries to become profitable again. And the
strange thing here is that the same management
team that ran the company into the ground often
gets to stay in charge. That's the concept of
the debtor in position or DIP. The company's
existing management continues to run the day
-to -day business, but now they're doing it under
the supervision of the bankruptcy court. And
they have a duty to the creditors now. Fiduciary
duty. Their job is to create a plan of reorganization
that details how the company will survive and
how it will pay back its debts over time. Creditors
get to vote on that plan. And if it's approved,
the company can emerge with less debt and a healthier
balance sheet. That's the goal. It's a very powerful
tool for survival. And you'll sometimes hear
people in finance talk about a Chapter 22. What's
that? That's just slang for a company that's
filing for Chapter 11 a second time. Okay, so
we have Chapter 7 for liquidation and 11 for
reorganization. The third main one is Chapter
13. Chapter 13 is the wage earner repayment plan.
This is for individuals who have a regular income
but need help. It's often for people who failed
the means test for Chapter 7 or for people who
want to save their house from foreclosure. And
the big difference is you get to keep all your
property. You do. Even property that would have
been sold in a Chapter 7. The tradeoff is that
you commit to a 3 -5 year repayment plan. You
pay all of your disposable income to a trustee
each month, and the trustee distributes it to
your creditors. And how long is the plan? 3 years
or 5? It depends on your income. If your income
is below your state's median, it's a 3 -year
plan. If it's above the median, it has to be
a 5 -year plan. And at the end of that period,
if you've made all your payments, you get a discharge
of any remaining eligible debt. But it's a long
haul. And if you miss payments, the case can
be dismissed, the automatic stay disappears,
and you're right back where you started. We've
established that in some countries, like Canada,
bankruptcy means liquidation, full stop. So they
need different tools if they want to restructure
and survive. They do. For individuals in Canada,
the main alternative to a personal bankruptcy
is something called a consumer proposal. And
what is that exactly? It's basically a formal
settlement offer you make to your creditors through
a trustee. It's for people with debts under $250
,000, not including their mortgage. You propose
to pay back a percentage of what you owe over
a maximum of five years. And why would creditors
agree to take less than what they're owed? Because
the alternative is that you file for personal
bankruptcy, where they would get even less money,
maybe just... pennies on the dollar after everything
is sold. A consumer proposal is almost always
a better deal for them. A bird in the hand. Exactly.
And once they accept it, all collection action
has to stop. And what about for big Canadian
companies that need that Chapter 11 style protection?
They use a law called the Companies Creditors
Arrangement Act, or CCAA. It's for businesses
with more than $5 million in debt, and it does
exactly what Chapter 11 does. It pauses all creditor
actions and gives the company time to come up
with a survival plan. OK, let's jump back across
the pond to the UK. We mentioned involuntary
bankruptcy there. Right. A creditor who is owed
at least £5 ,000 can petition the court to force
a person into bankruptcy. Why would they do that?
It sounds expensive and aggressive. It's usually
not about getting the most money back. It's about
control and investigation. Yeah. Sometimes it's
to force the sale of a major asset. Like a house.
What more often? It's to punish the debtor or,
more strategically, to get the power of the trustee
on their side. Once someone is bankrupt, the
trustee can go in and do a full forensic audit
of their finances, subpoena records, and uncover
hidden assets. So the creditor is essentially
using the system to hire a detective. That's
a good way to put it. But the U .K. system itself
has gotten much more debtor friendly. A bankruptcy
there now usually only lasts for a maximum of
12 months. That's a huge difference from the
three years in Australia. It's all part of that
fresh start philosophy. And a really key change
they made back in 2000 was to protect pensions.
Now, generally, your occupational pension is
safe and can't be seized in a bankruptcy. Which
is a huge deal for someone's long -term security.
A vital safeguard. It separates your future from
your present failure. And that idea seems to
be part of a much broader trend across the entire
European Union. It is. After the financial crises
in the early 2000s, there was a realization that
too many businesses were just ending up in liquidation.
It was destroying economic value. So they looked
for a better model. They did. And they looked
to the U .S. Starting around 2013, countries
like France, Germany, Spain, and Italy all revamped
their laws, modeling them on Chapter 11. The
goal was to shift from liquidation to restructuring.
Exactly. to give businesses a real chance to
survive a crisis. And it ties into this bigger
EU policy goal they call the second chance. A
second chance for entrepreneurs. Right. The philosophy
is that failure is a natural part of business
and innovation. The legal system shouldn't punish
it permanently. It should give honest entrepreneurs
a path back to developing a new business. So
we've come on this incredible journey. We started
with the literal broken bench of Renaissance
Italy, went through the horrors of debt slavery.
All the way to these highly complex, structured
legal frameworks we have today that are designed
to manage failure in a way that, well, benefits
everyone as much as possible. It's all about
trying to find that balance, isn't it? The creditor's
right to be paid versus the debtor's need for
a fresh start. That's the fundamental tension.
And we've seen how the focus has shifted so heavily
toward rehabilitation. The UK's 12 -month term.
the EU's second chance policy, the power of Chapter
11. The whole trend seems to be about preserving
the debtor, whether it's a person or a company.
It is. And that's what makes that one big outlier
in the U .S. system so stark. You're going back
to student loans. I have to. Because if the whole
purpose of modern bankruptcy law is to allow
for rehabilitation, to ensure a minimal standard
of living, to give people a fresh start. Then
what does this very specific, very difficult
carve out tell us? What does it say about our
priorities when this one particular class of
debt is so protected that a borrower has to prove
near permanent destitution just to get a partial
discharge? In a system built on second chances,
it forces you to ask which debts we as a society
have decided are more important than that second
chance itself. It suggests a really deep conflict
in our economic and maybe even moral calculus
about what debt is for and who ultimately has
to pay for it. A really profound question. It
is. And it's a tension point that you, the listener,
should definitely continue to think about. Something
to mull over indeed. Thank you for joining us
on this deep dive into the broken benches and
complex chapters of bankruptcy law. We'll see
you next time.