9 ms·

What's the alternative tho? If you take a loan, in most countries you're expected to pay it back, no? Do you think people should be able to default without cons

What's the alternative tho? If you take a loan, in most countries you're expected to pay it back, no? Do you think people should be able to default without consequence?

jurgenaut23 3y ago
Short answer: yes, but. Without consequence, of course not. But you should be able to 'separate' your professional and personal life, even as an entrepreneur. I would NEVER found my own business if I knew that going bankrupt would take away my kid's house. This is why instruments such as limited responsibility companies have been invented.
- jeffreygoesto 3y ago
  Knew a guy who tried to outsmart tax rules and founded the company as his wife's. Also had a big mortgage on their house. She fell in love with the local butcher (no joke) and one afternoon they emptied the bank account and flew to Goa. That guy lost his wife, his company and his house in one afternoon and went straight to ER with a heart attack.
  - WalterSear 3y ago
    And his butcher.
    - filoleg 3y ago
      That too. Doesn’t seem like a big deal, but I imagine if you have your own butcher in the first place, you are somewhat particular and specific about what you want (kind of similar to a lot of people clinging onto their usual hair stylist/barber for their dear life, once they find one that does things the way they like). And I would bet that the number of barber options around would be much larger than that for butchers.
- PurpleRamen 3y ago
  > But you should be able to 'separate' your professional and personal life, even as an entrepreneur. Why? In case of success, you have the personal benefit from it. So why should other people and society take the bill in case of your fail? Or how exactly is this supposed tor work?
  - bende511 3y ago
    If I go to open a restaurant and I can convince a bank to lend me capital to start the business, and then it fails, I can see an argument for why they shouldnt lend me money to open a second restaurant, at least not right away. But why should I be penalized in personal life for a business failing. Should the bank get to take my house if my restaurant fails? Should I be prevented from getting a credit card?
    - PurpleRamen 3y ago
      Where is the money coming from? And who should pay the bill you have left, when you fail? It will not disappear, and for the health of the system it can't disappear, so where is it going?
      - bende511 3y ago
        well, thats the risk the bank takes when they lend my business the money, that I might not be able to pay it all back. they eat the loss, minus whatever they can recover from assets left over. and I get a mark that says you should think twice before lending me money for a restaurant again. but my life isnt ruined. i get to keep my house, i can still participate in financial society. the alternative is, as someone else pointed out, only those with lots of resources can afford to try to create new businesses. the US policy is that its worth it to have a more lenient bankruptcy process, with more bankruptcies that are less ruinous, since it leads to more risk taking (ie new business formation).
        PurpleRamen 3y ago
        In Germany, your life is not ruined if you go bankrupt and have to pay for the fail you created. Society still gives you shelter, food, healthcare, even if you have lost your luxury. So there is no reason to make wasting resources and harming society simple.
koonsolo 3y ago
I think in US you can declare yourself bankrupt and start over. The only loan that doesn't work like that is a student loan.
- repomies69 3y ago
  Ah that's why they're complaining about the student loans. In The European countries I have been living in, the concept of personal bankcrupty doesn't exist in the same way, at least. People who get too much loans kind of just hang with them, after 15-20 years they are forgiven AFAIK.
  - eru 3y ago
    Btw, my suggestion for the US would be to remove that special bankruptcy exception for new student loans. That's because once you do that, the supply of new student loans would most likely dry up. Thus shutting off the money fountain for the education industry.
    - rayiner 3y ago
      Your suggestion wouldn’t work because nearly all student loans (over 90%) are issued by the federal government, which does not (and for political reasons, never will) evaluate credit risk.
      - bumby 3y ago
        An alternative is to tie the federal student loan program to a regulation in school cost. If the school exceeds some threshold, their students are no longer qualify for federally-backed loans. Granted, it creates administrative burden but it’s the only proposal I’ve heard that seems to address the root problem of tuition costs and almost unfettered access to collateral-free loans.
        rayiner 3y ago
        That would be a good idea.
ArnoVW 3y ago
In many countries there is the idea of bankrupcy. You make the debtor suffer for a couple of years (to ensure incentive against it) and then wipe the slate. Bankrupcy is no fun. All your assets are wiped out (house, cars, etc). Sometimes you are excluded from the banking system. So it's not "without consequence". Lending money is a risky business. That is why you get interest. Getting people off the hook is not ideal, but neither is the inverse. From a societal point of view, this arrangement allows people to take risks that they may not have otherwise. And we're all better off because of it.
- arrowsmith 3y ago
  Do some countries not have a concept of bankruptcy?
  - kome 3y ago
    I would say, most of countries in Europe do not have bankruptcy laws that are lenient like in the US.
  - throw__away7391 3y ago
    Most of Europe does not have bankruptcy laws comparable to the US. Technically they do exist but the differences in the details are so large they may as well be called two different things.
    - scherlock 3y ago
      Also, the reason people go bankrupt in the US are very different than the reasons people go bankrupt in Europe. 2/3 of personal bankruptcy in the US is linked to medical debt somehow. That is not the case in Europe.
      - threemux 3y ago
        > 2/3 of personal bankruptcy in the US is linked to medical debt somehow Often cited, but wrong. When you dig in, it turns out to be one of those "wet streets cause rain" causal mix-ups: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5865642/ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5865642/
throw__away7391 3y ago
You declare bankruptcy and walk away, more or less without serious consequences so long as you were not deliberately fraudulent. You may have trouble getting another loan or conversely you may find it easier now that you have relatively more experience than before. Germany in particular takes a moralistic approach to finances that IMO harms the economy quite a bit and constrains entrepreneurship to the well connected and already established. You are only supposed to start businesses that succeed. In reality money is not a real thing, money is numbers in a computer database that we collectively signal and coordinate the economic activity and utilization of the resources that hold the real value. As such a certain amount of default well above zero is optimal to maximize the amount of real world value being generated.
- phkahler 3y ago
  >> As such a certain amount of default well above zero is optimal to maximize the amount of real world value being generated. Someone who had worked in banking once told me they adjust lending standards to maximize profit. I was shocked that this meant about a 6-7 percent default rate on the mortgage loans. If you are too stringent you won't lend any money and if you let it flow freely you'll fail under all the defaults, so yes there is an optimal amount of failure even for the lender.
  - adamomada 3y ago
    Bookmarked this post when I saw it here a while ago, seems the optimal amount of anything “bad” is non-zero https://www.bitsaboutmoney.com/archive/optimal-amount-of-fraud/ https://www.bitsaboutmoney.com/archive/optimal-amount-of-fra...
- PurpleRamen 3y ago
  > Germany in particular takes a moralistic approach to finances that IMO harms the economy quite a bit and constrains entrepreneurship to the well connected and already established. You are only supposed to start businesses that succeed. It's more pragmatic, than moralistic. Germany aims for high quality in business and workers, the whole system is based around this. USA seems more aiming for quantity. Just throw money at it, and see what sticks. But the difference is, USA is very big and wealthy in resources and manpower, so it can afford this. Germany, like other European countries, is rather small and lives from connecting with others. So efficiency is very important.
RobotToaster 3y ago
If a large corporation takes out a loan, even a substantial one, and fails, the corporation can just go bust and the people behind it have no responsibility. A new business generally requires a director's guarantee to get a loan, completely defeating the point of a limited company.
- nerdawson 3y ago
  A new business hasn't proven itself viable therefore it's a huge risk to a bank. Between personally guaranteeing a loan and not having the funding available at all, I'd take the former. Once the business has been trading for a while and shows it has a working model, it shouldn't have any problem financing without a personal guarantee. Either way, limited liability remains crucial. You're still in control of how much personal risk you're accepting, putting a backstop on any loss.
- vidarh 3y ago
  But that's the norm almost everywhere. Try going into a regular US bank and ask for a loan for an LLC. Almost everywhere will expect collateral and/or a business plan and/or personal guarantees if the business is new. Some countries have more risk-averse banks than others, but it's a matter of degree not a fundamental difference, and generally reflected in interest. And it then just changes the calculus of when you look for investors rather than lenders.
pge 3y ago
equity financing rather than debt
no_wizard 3y ago
Bankruptcy in the US for example, is way more straightforward for businesses compared to individuals. Its not nearly as frowned upon for businesses. Take for instance: In Silicon Valley for instance, many founders of successful businesses had multiple failures founding other startups first, it seemingly is part of the Silicon Valley ethos, almost looked at with a badge of honor.
kergonath 3y ago
Il am not sure I think that, but as a matter of fact successful people tend to be bankrolled by either friends, family, or some kind of extended network that allows them to fail several times. I think it is unfair, and I find it really obnoxious when they lecture us about grit and bootstraps instead of being grateful for their network or luck, but it is what it is.
- helveticar 3y ago
  Yes, exactly this. A second chance is a safety net, available mostly to those with the circumstances or resources to deploy it. One helpful circumstance being youth (plenty of time), while an obvious resource is personal or, more likely for the younger, parental wealth. Attitudes to risk taking are similar, e.g. your fear of high wire walking depends hugely on whether you have a safety line or not. Wealthy kids might pride them themselves on taking chances where the reality is that in their whole existence they have never been exposed to the possibility of paying the price for failure.
HlessClaudesman 3y ago
The alternative is VC / investors. They don't get their money back if your buisness fails, but you have given away much of your equity if you succeed. Generally a much better deal for first time founders.
eadmund 3y ago
Liability limitation exists in order for people to take risks without losing everything. A person or persons can form a company (such as a corporation or limited liability company), invest assets in it and so long as they conduct business properly their personal assets are safe from business creditors. Part of conducting business properly is typically that counterparties know that they are dealing with a limited-liability structure (e.g. by ‘inc.’ or ‘limited’ in the name); another part is complying with the law (e.g. typically failure to pay employees can lead to claims on personal assets). This offloads some risk from the owners of the company to its business partners, it ended up enabling a real revolution in business formation and ownership. In a lot of ways it has had a democratising effect, as many more folks can afford to invest in a company than just those who are wealthy enough to bear the risk of unlimited liability.
- mminer237 3y ago
  You generally have to either have a ton of capital or a great idea to get started without any personal liability though. Nobody's going to loan money to an LLC with no assets without a personal surety.
  - eadmund 3y ago
    Without liability limitation one would need even more (an order of magnitude?) capital, and given the risk it might not be worth it at all. > Nobody's going to loan money to an LLC with no assets without a personal surety. I think that’s the system working. Customers, vendors and other business partners are also free to adjust their expectations accordingly.
immibis 3y ago
"What's the alternative to, if someone fails to open a business, taking them out back and shooting them in the head?" I am unable to rightly comprehend the confusion of ideas that would provoke such a question.
Manuel_D 3y ago
Not in American tech venture capital. They expect to make a positive ROI on only maybe 20-10% of their investments.

What's the alternative tho? If you take a loan, in most countries you're expected to pay it back, no? Do you think people should be able to default without consequence?

jurgenaut23 3y ago

Short answer: yes, but. Without consequence, of course not. But you should be able to 'separate' your professional and personal life, even as an entrepreneur. I would NEVER found my own business if I knew that going bankrupt would take away my kid's house. This is why instruments such as limited responsibility companies have been invented.

jeffreygoesto 3y ago
Knew a guy who tried to outsmart tax rules and founded the company as his wife's. Also had a big mortgage on their house. She fell in love with the local butcher (no joke) and one afternoon they emptied the bank account and flew to Goa. That guy lost his wife, his company and his house in one afternoon and went straight to ER with a heart attack.
- WalterSear 3y ago
  And his butcher.
  - filoleg 3y ago
    That too. Doesn’t seem like a big deal, but I imagine if you have your own butcher in the first place, you are somewhat particular and specific about what you want (kind of similar to a lot of people clinging onto their usual hair stylist/barber for their dear life, once they find one that does things the way they like). And I would bet that the number of barber options around would be much larger than that for butchers.
PurpleRamen 3y ago
> But you should be able to 'separate' your professional and personal life, even as an entrepreneur. Why? In case of success, you have the personal benefit from it. So why should other people and society take the bill in case of your fail? Or how exactly is this supposed tor work?
- bende511 3y ago
  If I go to open a restaurant and I can convince a bank to lend me capital to start the business, and then it fails, I can see an argument for why they shouldnt lend me money to open a second restaurant, at least not right away. But why should I be penalized in personal life for a business failing. Should the bank get to take my house if my restaurant fails? Should I be prevented from getting a credit card?
  - PurpleRamen 3y ago
    Where is the money coming from? And who should pay the bill you have left, when you fail? It will not disappear, and for the health of the system it can't disappear, so where is it going?
    - bende511 3y ago
      well, thats the risk the bank takes when they lend my business the money, that I might not be able to pay it all back. they eat the loss, minus whatever they can recover from assets left over. and I get a mark that says you should think twice before lending me money for a restaurant again. but my life isnt ruined. i get to keep my house, i can still participate in financial society. the alternative is, as someone else pointed out, only those with lots of resources can afford to try to create new businesses. the US policy is that its worth it to have a more lenient bankruptcy process, with more bankruptcies that are less ruinous, since it leads to more risk taking (ie new business formation).
      - PurpleRamen 3y ago
        In Germany, your life is not ruined if you go bankrupt and have to pay for the fail you created. Society still gives you shelter, food, healthcare, even if you have lost your luxury. So there is no reason to make wasting resources and harming society simple.

koonsolo 3y ago

I think in US you can declare yourself bankrupt and start over. The only loan that doesn't work like that is a student loan.

repomies69 3y ago
Ah that's why they're complaining about the student loans. In The European countries I have been living in, the concept of personal bankcrupty doesn't exist in the same way, at least. People who get too much loans kind of just hang with them, after 15-20 years they are forgiven AFAIK.
- eru 3y ago
  Btw, my suggestion for the US would be to remove that special bankruptcy exception for new student loans. That's because once you do that, the supply of new student loans would most likely dry up. Thus shutting off the money fountain for the education industry.
  - rayiner 3y ago
    Your suggestion wouldn’t work because nearly all student loans (over 90%) are issued by the federal government, which does not (and for political reasons, never will) evaluate credit risk.
    - bumby 3y ago
      An alternative is to tie the federal student loan program to a regulation in school cost. If the school exceeds some threshold, their students are no longer qualify for federally-backed loans. Granted, it creates administrative burden but it’s the only proposal I’ve heard that seems to address the root problem of tuition costs and almost unfettered access to collateral-free loans.
      - rayiner 3y ago
        That would be a good idea.

ArnoVW 3y ago

In many countries there is the idea of bankrupcy. You make the debtor suffer for a couple of years (to ensure incentive against it) and then wipe the slate. Bankrupcy is no fun. All your assets are wiped out (house, cars, etc). Sometimes you are excluded from the banking system. So it's not "without consequence". Lending money is a risky business. That is why you get interest. Getting people off the hook is not ideal, but neither is the inverse. From a societal point of view, this arrangement allows people to take risks that they may not have otherwise. And we're all better off because of it.

arrowsmith 3y ago
Do some countries not have a concept of bankruptcy?
- kome 3y ago
  I would say, most of countries in Europe do not have bankruptcy laws that are lenient like in the US.
- throw__away7391 3y ago
  Most of Europe does not have bankruptcy laws comparable to the US. Technically they do exist but the differences in the details are so large they may as well be called two different things.
  - scherlock 3y ago
    Also, the reason people go bankrupt in the US are very different than the reasons people go bankrupt in Europe. 2/3 of personal bankruptcy in the US is linked to medical debt somehow. That is not the case in Europe.
    - threemux 3y ago
      > 2/3 of personal bankruptcy in the US is linked to medical debt somehow Often cited, but wrong. When you dig in, it turns out to be one of those "wet streets cause rain" causal mix-ups: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5865642/ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5865642/

throw__away7391 3y ago

You declare bankruptcy and walk away, more or less without serious consequences so long as you were not deliberately fraudulent. You may have trouble getting another loan or conversely you may find it easier now that you have relatively more experience than before. Germany in particular takes a moralistic approach to finances that IMO harms the economy quite a bit and constrains entrepreneurship to the well connected and already established. You are only supposed to start businesses that succeed. In reality money is not a real thing, money is numbers in a computer database that we collectively signal and coordinate the economic activity and utilization of the resources that hold the real value. As such a certain amount of default well above zero is optimal to maximize the amount of real world value being generated.

phkahler 3y ago
>> As such a certain amount of default well above zero is optimal to maximize the amount of real world value being generated. Someone who had worked in banking once told me they adjust lending standards to maximize profit. I was shocked that this meant about a 6-7 percent default rate on the mortgage loans. If you are too stringent you won't lend any money and if you let it flow freely you'll fail under all the defaults, so yes there is an optimal amount of failure even for the lender.
- adamomada 3y ago
  Bookmarked this post when I saw it here a while ago, seems the optimal amount of anything “bad” is non-zero https://www.bitsaboutmoney.com/archive/optimal-amount-of-fraud/ https://www.bitsaboutmoney.com/archive/optimal-amount-of-fra...
PurpleRamen 3y ago
> Germany in particular takes a moralistic approach to finances that IMO harms the economy quite a bit and constrains entrepreneurship to the well connected and already established. You are only supposed to start businesses that succeed. It's more pragmatic, than moralistic. Germany aims for high quality in business and workers, the whole system is based around this. USA seems more aiming for quantity. Just throw money at it, and see what sticks. But the difference is, USA is very big and wealthy in resources and manpower, so it can afford this. Germany, like other European countries, is rather small and lives from connecting with others. So efficiency is very important.

RobotToaster 3y ago

If a large corporation takes out a loan, even a substantial one, and fails, the corporation can just go bust and the people behind it have no responsibility. A new business generally requires a director's guarantee to get a loan, completely defeating the point of a limited company.

nerdawson 3y ago
A new business hasn't proven itself viable therefore it's a huge risk to a bank. Between personally guaranteeing a loan and not having the funding available at all, I'd take the former. Once the business has been trading for a while and shows it has a working model, it shouldn't have any problem financing without a personal guarantee. Either way, limited liability remains crucial. You're still in control of how much personal risk you're accepting, putting a backstop on any loss.
vidarh 3y ago
But that's the norm almost everywhere. Try going into a regular US bank and ask for a loan for an LLC. Almost everywhere will expect collateral and/or a business plan and/or personal guarantees if the business is new. Some countries have more risk-averse banks than others, but it's a matter of degree not a fundamental difference, and generally reflected in interest. And it then just changes the calculus of when you look for investors rather than lenders.

pge 3y ago

equity financing rather than debt

no_wizard 3y ago

Bankruptcy in the US for example, is way more straightforward for businesses compared to individuals. Its not nearly as frowned upon for businesses. Take for instance: In Silicon Valley for instance, many founders of successful businesses had multiple failures founding other startups first, it seemingly is part of the Silicon Valley ethos, almost looked at with a badge of honor.

kergonath 3y ago

Il am not sure I think that, but as a matter of fact successful people tend to be bankrolled by either friends, family, or some kind of extended network that allows them to fail several times. I think it is unfair, and I find it really obnoxious when they lecture us about grit and bootstraps instead of being grateful for their network or luck, but it is what it is.

helveticar 3y ago
Yes, exactly this. A second chance is a safety net, available mostly to those with the circumstances or resources to deploy it. One helpful circumstance being youth (plenty of time), while an obvious resource is personal or, more likely for the younger, parental wealth. Attitudes to risk taking are similar, e.g. your fear of high wire walking depends hugely on whether you have a safety line or not. Wealthy kids might pride them themselves on taking chances where the reality is that in their whole existence they have never been exposed to the possibility of paying the price for failure.

HlessClaudesman 3y ago

The alternative is VC / investors. They don't get their money back if your buisness fails, but you have given away much of your equity if you succeed. Generally a much better deal for first time founders.

eadmund 3y ago

Liability limitation exists in order for people to take risks without losing everything. A person or persons can form a company (such as a corporation or limited liability company), invest assets in it and so long as they conduct business properly their personal assets are safe from business creditors. Part of conducting business properly is typically that counterparties know that they are dealing with a limited-liability structure (e.g. by ‘inc.’ or ‘limited’ in the name); another part is complying with the law (e.g. typically failure to pay employees can lead to claims on personal assets). This offloads some risk from the owners of the company to its business partners, it ended up enabling a real revolution in business formation and ownership. In a lot of ways it has had a democratising effect, as many more folks can afford to invest in a company than just those who are wealthy enough to bear the risk of unlimited liability.

mminer237 3y ago
You generally have to either have a ton of capital or a great idea to get started without any personal liability though. Nobody's going to loan money to an LLC with no assets without a personal surety.
- eadmund 3y ago
  Without liability limitation one would need even more (an order of magnitude?) capital, and given the risk it might not be worth it at all. > Nobody's going to loan money to an LLC with no assets without a personal surety. I think that’s the system working. Customers, vendors and other business partners are also free to adjust their expectations accordingly.

immibis 3y ago

"What's the alternative to, if someone fails to open a business, taking them out back and shooting them in the head?" I am unable to rightly comprehend the confusion of ideas that would provoke such a question.

Manuel_D 3y ago

Not in American tech venture capital. They expect to make a positive ROI on only maybe 20-10% of their investments.