Release valves stop pressure from building to dangerous levels. Release valves prevent overload. Water heaters, for example, are equipped with pressure release valves that allow the drainage of extra fluid that would otherwise cause damage to the heaters.
Human conduct and the society in which it is housed, oddly enough, is similarly equipped. Bankruptcy is a release valve for the economy.
In 2008, there were approximately 1.1 million U.S. bankruptcy filings. In 2009, there were around 1.4 million. Contrast those figures to pre-recession rates: roughly 600,000 and 850,000 in 2006 and 2007, respectively.
Here is a bold but largely ignored proposition: bankruptcy is good for the economy. It's good for individual consumers and it's good for business.
Let's consider business and the job of starting one. Entrepreneurs help build and maintain the U.S. economy. According to Black's Law Dictionary, an entrepreneur is "one who initiates and assumes the financial risks of a new enterprise and who usually undertakes its management." Here, assuming financial risk illustrates the role of bankruptcy.
Forget, for a moment, Google's star. For every fantastic success there is also failure. There is no shortage of statistics citing the high failure rates of startups. But the classic entrepreneur's trait is perseverance. So goes a familiar proverb: failure is not falling but refusing to stand.
For entrepreneurs to ultimately succeed, they must first learn by doing things ineffectively and failing. This freedom to learn and improve is essential. Through bankruptcy, the entrepreneur is freed of the weight of debt and financial obligation. The entrepreneur can try again. And if he or she does succeed, products are built, services are rendered, and people are employed.
This isn't just the case for businesses, though. When individuals are allowed to file bankruptcy, they are also freed to learn from past challenges. If people are forced to spend their whole lives just racing to catch up on past due bills and outstanding debts accrued during difficult times, they will never be able to build a strong financial future. Bankruptcy gives people a break.
In short, bankruptcy releases the pressure of a down economy, and entrepreneurs and employees can get back to work.
