B

BALANCE THEORY

See Attitudes; Cognitive Consistency Theories.

BANKRUPTCY AND CREDIT

Every society must resolve the tension between
debtors and creditors, especially if the debtors
cannot pay or cannot pay quickly enough. Many of
the world’s religions have condemned lending
money for interest, at least among co-religionists.
In traditional societies, money lenders, although
necessary for ordinary commerce, were often
viewed as morally suspect. The development of a
robust capitalism was based upon raising capital
by paying interest or dividends, and so it has been
important for capitalist societies to develop insti-
tutions and mechanisms for handling debt and credit.

The inherent tension between creditors and
debtors turns upon the creditor’s claim to justice
as the property owner and the debtor’s interest in
fairness in the terms of repayment. To be sure,
lenders sometimes used their position to create
social control mechanisms such that debtors often
could never work their way out of debt. Such
arrangements as sharecropping and the use of the
company store often tied laborers to employers
through the bonds of debt. With some exceptions,
states and legal regimes upheld property rights
against the claims of the debtors.

Through the years, societies have sanctioned
creditors’ use of slavery, debt-prison, transporta-
tion to debtors’ colonies, debt-peonage, seizure of
assets or garnishment of wages to control debtors.

Most such methods, however, work to the advan-

tage only of the first creditor or the most aggres-

sive creditor to demand payment. Bankruptcy, as

used in the United States and a number of other

countries, provides a means for resolving not only

the debtor-creditor conflict but also the potential

conflict among creditors.

Bankruptcy is a very old concept. The word

itself comes from an Italian phrase meaning

‘‘broken bench,’’ because a bankrupt merchant’s

work bench would be broken by his creditors if he

could not repay the debt. In the United States,

each state has laws governing debtor-creditor rela-

tions, but the enactment of bankruptcy statutes is

reserved to the Congress by the U.S. Constitution.

United States bankruptcy occurs in the federal

courts and is regulated by statutes enacted by

Congress. Special bankruptcy courts are located in

each federal judicial district, and specially appoint-

ed bankruptcy judges oversee the caseload. Bank-

ruptcy decisions may be appealed to the federal

district court and subsequently to the federal ap-

peals court and the U.S. Supreme Court.

Bankruptcy is technically different from insol-

vency. Insolvency refers to a financial situation in

which a person or business has liabilities that

exceed assets. To be bankrupt, the debtor must file

for bankruptcy protection in the federal court.

Although the overwhelming majority of individu-

als filing for bankruptcy are also insolvent, occa-

sionally a solvent business will file for bankruptcy

because of anticipated liabilities that will exceed its

assets. An example of such a bankruptcy is that of

pharmaceutical manufacturer A. H. Robbins, whose