So when an individual borrows and fails to repay, there is a moral hazard, but when a business declares bankruptcy and restructure, that's smart business?

Debt is a contractual issue, not a moral one. As HackerNews entrepreneurs should keep in mind, its the ability to easily shed debt (and not be shackled to those debts for decades) in the US that creates the environment for startups to take the risks they do.

The moral obligation is to TRY to pay it back. I fully concede that it's not a black and white issue, but there's a big difference between refusing to pay a debt and being unable to pay a debt.

If you borrow money for any reason with the understanding that you'll pay it back, but you secretly intend to keep it all along, then you are doing something wrong (morally if not legally).

> If you borrow money for any reason with the understanding that you'll pay it back, but you secretly intend to keep it all along, then you are doing something wrong (morally if not legally).

We are in complete agreement then. To do otherwise would be, in my opinion, fraud.

"Debt is a contractual issue, not a moral one."

Keeping one's word is always a moral issue. The bad practices of others (businesses or individuals) do not change the value of my word.

Who is lending money to startups?

Am I not reading often on HN about long-term agreements startups in SFBA are committing themselves to (specifically real estate/office space leases)? That's a debt, and when a startup burns up, any time left on that lease is a debt left unpaid. Debt is not just VC money in hand.

Anyone who invoices after services are provided instead of before, for one.

A secured debt is a contractual issue. An unsecured debt is a moral issue.

I think the issue is assuming the company charging the account are behaving in a moral manner.

Changing terms after the fact, dark patterns, charging for things the customer didn't agree to, over billing for cable services in the hope the customer just doesn't notice or gets worn down by trying to fight it.

There are a lot of times the corporation is unequivocally in the wrong, but they already billed your card and you have to fight to get it back. Being able to cancel the card first and force the corporation to take you to court and prove their case could help put the consumer on a more level playing field.

Except that's not what happens, you borrow money with the explicit notion that you might not repay it; that's what sets the interest rate, both sides know that going in. There's nothing at all immoral about choosing to suffer the hit on your credit rather than repay as both options are expected possible outcomes in the original deal.

> you borrow money with the explicit notion that you might not repay it; that's what sets the interest rate, both sides know that going in.

The interest rate is set by the fact that money-NOW is worth more than money-in-a-few-months-or-years. This is also the case if it's certain you will get the money.

I never considered that risk would also be a factor in interest rates. It makes sense, but I really doubt it's a very big factor. Since in most cases debt means you will eventually get the money back, the risk is very little (depending on economic health, I guess). But the "money now vs money then" factor is always present.

Can anyone with a little more insight into these matters inform us whether risk of not being paid back actually represents a substantial amount of the interest rate? Cause I doubt it.

> There's nothing at all immoral about choosing to suffer the hit on your credit rather than repay as both options are expected possible outcomes in the original deal.

Is that how it works in America? Because as an outsider, this sounds very weird to me.

Say you have a debt with me, you fail to repay me but instead you opt to "take a hit on your credit score", which is, I presume, some sort of abstract "score" number kept by agreements between cc-corporations, banks and such? (or is it a government thing? probably not)

So this credit score determines whether you can get certain loans at banks, interest rates for your credit cards, stuff like that yes?

In the mean time there's me. What do I care about your credit score? Do I get to think, "hey I didn't get my money, but at least that guy is going to have a shitty time securing loans from now on and having a stable financial future". How does that help me? You still screwed me over by not paying me back, and the simple fact that, in the process, you also screwed yourself over doesn't help me at all. I'm not the vindictive kind, and some abstract revenge credit score "punishment" you suffer in your standing with other institutions won't get me my money back.

See, this doesn't make it moral, at all.

The fact that we both know, if you don't pay me back, you'll be screwing yourself over by means of credit score, just means that I might be more likely to believe you that you'd rather pay back your debt than suffer that hit. Meaning less risk for me. But if it turns out that not paying and suffering the hit is in fact a serious alternative option for you (instead of a deterrent), you may as well say "I'll pay you back or I stab myself in the eye"--what do I care? (well in fact I would prefer if you didn't, because in my personal ethical framework, such deals themselves are immoral)

This analogy doesn't relate to OP's comment. He's talking about secured debt with institutional lenders, not interpersonal loans. Risk is an integral component to determining your interest rate in the US. This is why there is an industry around protecting, understanding, and improving one's FICO score here. Try getting a good loan with a crappy (or substandard) credit score.

Spoiler Alert:

You can't.

Risk is THE biggest factor in interest rates. If it was all timevalue we'd be paying interest closer to inflation rates.

Put yourself in the shoes of a lender. On one hand is a doctor, $300k salary, looking to borrow $30k for a new boat. 780 fico. On the other is Trevor, a bartender who makes $25k a year, has a 680 fico with some late payments and a cable bill collection from 2 years ago and wants $30k for a new car.

Would you lend to them both at the same rate? Both will have the same time value effects....

Thanks for clarifying, everybody.

> The interest rate is set by the fact that money-NOW is worth more than money-in-a-few-months-or-years. This is also the case if it's certain you will get the money.

No, interest rates are a measure of risk; the bigger the risk of default the higher the interest rate. Bad credit score equals very high interest rate.

Secondly, stop pretending you're the lender, we're talking about banks here, not personal loans from friends.

When you take out a loan with a bank, it's a business deal with explicit exit strategies baked in: pay off loan, or default loan. Both options are valid exits according to the contract. Morality simply isn't a factor in this equation.

When lending money, you are under a moral obligation to bear the consequences of the risk you assumed.

The bible calls for a debt jubilee - forgiveness of all debts - every seven years. No such thing has happened in hundreds of years. So who acting immorally, again?

It was every 50 years, not 7. And it also stated that prisoners would be freed. We don't actually do everything the bible says to do... thankfully. http://en.wikipedia.org/wiki/Jubilee_(Christianity)

There's some ambiguity in the scriptures. See Deuteromy 15:1-11:

"At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD's time for canceling debts has been proclaimed."

(http://www.biblestudytools.com/deuteronomy/passage.aspx?q=de...)

It's interesting to imagine a world where there was no legal recourse to someone not paying back debt: easy to imagine some first-order consequences, harder to see how it'd change the grand scheme of things. I suspect it would end up being a much better world, but I come from a very anti-debt perspective.

> It's interesting to imagine a world where there was no legal recourse to someone not paying back debt [...]

I think it sounds scary. If I enter into a contract that says I have to do something in exchange for something else, I'd like a court to honor that contract, and not -- somewhat arbitrarily I'd say -- declare debts in the contract invalid after seven years.

Imagine no one being able to issue debt with a maturity of more than 7 years. That would be the consequence of such an interference into the market. This means our economy as a whole would become even more sensitive to interest rate volatility, as you can't secure the interest on a loan for more than 7 years at a time.

I think it would be even scarier than that. I imagine very few people would even issue debt. I know I would not. People default on debt all the time now and there is some legal recourse. I can only imagine how many people would default if there was no consequence. So now even people with every intention to repay their debt won't even get it. I believe that this would lead to an even bigger class gap because people who don't have the money to start businesses, buy houses or cars, etc no longer can get a loan to do it. I think it really would create a bigger divide between the Haves and the Have-Nots.

I'm not saying that having a bunch of debt is good. But imagine where you'd be right now if you couldn't get a student loan for an education. Or finance a car or a house. I'm pretty sure I would not be where I am now if I hadn't gone to school... which I would not have been able to do without a student loan. And I never would have been able to get a house without a loan.

My perspective is that a whole lot of our economic problems (in the USA) stem from personal debt. It wouldn't be the end of the world if people typically had to earn enough money to own a house before buying a house--in fact, it would decrease home prices, since the ability to get mortgages and the promise of government violence if you don't pay them back inflates the cost of housing stock. And student loans are literally slavery--they similarly inflate educational expenses, and even worse can't be discharged in bankruptcy. An end result is otherwise educated people face a large marginal tax rate that cuts into productivity, and far too many choosing education that is mostly a waste of money since they don't have to pay for it, until some unforeseen point in the future.

I think it's also easy to overstate how much loaning would decrease. The widespread use of credit scores when issuing loans belies the idea that it's only state violence that ensures people pay back debts.

Why do you want the court to honor the contract? (Which is a bit euphemistic, to my mind: it means to use organized violence or the threat of it to extract value from someone.)

Maybe it'd make sense in a totally anonymous world, but why not just do business with people or entities you can trust? Think web of trust. That's what consumers and businesses de facto do nowadays anyway.

You could still issue debt; it's just you can't expect to have violence to back it up. Past decisions and alignment of lender and borrower self-interest determine the likelihood of it being paid back.

The bible doesn't define morality nor are its recommendations necessarily moral.