Tuvalu Princesses wrote:Government's response to bankruptcy could even be hardened up a bit. Why are honest traders punished for doing business with deadbeats? Is it really just "can't get blood from a stone" ie sheer practicality, which lets busted mortgage holders or bad business operators, spend now but not have to pay later?
It is a simple matter of what's more practical. Nobody gets a loan unless they have good credit or have collateral so that in the event that repayment stops, the lender isn't completely screwed over. I'm sure you wouldn't want to lend out $1,000 or any other large amount to just anyone, unless you could be fairly certain that you'd be getting $1,100 back in that example. But in any case, you'd be taking on a risk that worst case scenario- you'll never get paid back and you'll lose all the money that was lended out.
How the credit system works is a bit arbitrary, but it works in that people with a history of repayment or no late fees and etc. (also known as having "good" credit score) are more likely to repay what they borrowed and thus, are a better risk from the perspective of creditors of all types.
If someone defaults on a mortgage, their real estate is supposed to be the collateral for the bank, in the event that the mortgage can't be fully repaid. Its worthwhile from the bank's perspective because if they can evict the previous owner and get ownership of the real estate, they can usually sell at a profit to someone else, enough anyways to fully recoup more than the amount that was owed to them. But this isn't always a given.
As for a business owner, they have to convince a bank that their business model actually works in terms of being profitable or have some form of collateral if they want a loan to make payroll or whatever other major expense. The expectation of repayment + interest is the same.