Bankrupt

American Airlines, with over four billion dollars in the bank, declared bankruptcy recently.  It was losing money, and, as James Surowiecki explained in the most recent issue of the New Yorker, by declaring bankruptcy, the company will be able to cut its debt and tear up its union contract.

The bankruptcy declaration was not seen as immoral.  American Airlines is not seen as a deadbeat company.  Instead, financial analysts see the bankruptcy as a good business decision, a smart move, justified by economics.

As Mr. Surowiecki points out, a home buyer who owes fifty percent more than his or her house is worth should, as a smart business decision, walk away from the home.  Why continue to pay good money for a relatively worthless piece of property?

The main reason more home buyers don’t default is because of the stigma attached.  The head of the Mortgage Bankers Association said people who default were sending the wrong message “to their family and their kids and their friends.”  This is the same Mortgage Bankers Association that did a short sale of its headquarters, dumping it for thirty-four million dollars less than the mortgage value.

Let me sum it up.  If you are a large company and declare bankruptcy, you are making an astute business decision.  If you are a home buyer who owes a large amount of money on a home that has dropped in value and you walk away, you are an immoral deadbeat.  That is the way free enterprise works in America.