Question

As the global pandemic has not slowed with its spread, many business owners and individuals have considered filing bankruptcy. As part of the health and safety measures, courtrooms have been closed to slow or deter the spread of the virus. A small business owner and her business partner have decided to file bankruptcy as the pandemic has slowed business over the past three months laving uncertain of future business.

•Should debtors with older vehicles be allowed to take an additional deduction for operating expenses? Explain.

Answer 1

Debtors with older vehicles should not be allowed to take an additional deduction for operating expenses as the financial institutions will suffer. If financial institutions suffer, it will lead to much more crisis and government expenditure in bailing out such institutions as they have household savings at risk if they default.

Additionally, debtors owning old vehicles should infact be incentivised to sell their old vehicles because they cause huge social costs by generating negative externalities by way of increased pollution levels and expenditure.

They should be given incentives to buy a new vehicle at a lower interest rate, so that those who can afford will buy new vehicles and increase demand in the economy and thus drive new businesses.

Additionally debtors often have insurance cover which takes care of such expenses and as there is a pandemic, the car is also not used extensively, which leads to much more benefit being gained by selling the car or incurring minimal operational expenses.