Why Bankruptcy Can Be Better Than Doing Nothing: A Creditor’s Perspective
For over 25 years, I worked as a debtor’s attorney, filing over 4,000 Chapter 7 and Chapter 13 bankruptcy cases to help individuals rebuild their financial lives. Today, I exclusively represent creditors, ensuring they recover what they are owed under Texas law. From my extensive experience, I’ve observed how bankruptcy not only impacts debtors but also affects creditors’ ability to recover debts.
While bankruptcy may seem counterintuitive to achieving financial recovery, the Federal Reserve Bank of New York’s report highlights how filing for bankruptcy can create opportunities for both debtors and creditors. Here’s why bankruptcy can often be better than doing nothing, even from a creditor’s standpoint.
Bankruptcy Can Increase Access to Credit
A common misconception is that filing for bankruptcy cuts off access to credit. However, the opposite is often true.
Post-Bankruptcy Credit Access
As the Federal Reserve report demonstrates, individuals who complete their bankruptcy case are more likely to gain access to new lines of credit than those who struggle unsuccessfully to pay their debts. This is because:
- Debtors who file bankruptcy discharge their unsecured debts, making them less risky for future creditors.
- Creditors can recover their owed amounts more predictably through the bankruptcy process than through unstructured repayments.
For creditors, this means a more efficient recovery process and less uncertainty in collections.
Bankruptcy Can Improve Credit Scores
Filing for bankruptcy can provide a pathway for debtors to rehabilitate their credit. While the bankruptcy itself is a negative mark, discharged debts are listed as having a zero balance. This reduces the overall negative impact of prolonged delinquencies or charge-offs.
For creditors, this reset increases the likelihood of future debt recovery and reduces the risk of prolonged non-payment.
Bankruptcy Reduces Financial Stress
For individuals overwhelmed by debt, bankruptcy can provide relief from harassing phone calls, lawsuits, and financial uncertainty. The Federal Reserve report notes that those who file for bankruptcy experience less financial stress compared to those who do nothing.
From a creditor’s perspective, reducing a debtor’s stress through a structured bankruptcy filing can facilitate better communication and resolution, rather than prolonging unproductive disputes.
Bankruptcy Brings Peace of Mind and Certainty
One of the strongest advantages of bankruptcy is the peace of mind it brings:
- Debtors no longer have to fear collection calls, letters, or lawsuits.
- Creditors benefit from the structured and lawful resolution of outstanding debts.
The certainty provided by bankruptcy ensures that creditors are treated fairly and equitably in the distribution of a debtor’s assets.
How Bankruptcy Benefits Creditors
While many view bankruptcy as solely a debtor’s tool, creditors benefit significantly from the process:
- Transparency: Bankruptcy proceedings require debtors to disclose all assets and liabilities, reducing the risk of hidden assets.
- Efficiency: Creditors can participate in a structured repayment plan or liquidation process, increasing the likelihood of recovery.
- Legal Protections: The process ensures that creditors’ claims are addressed in accordance with the law, minimizing potential disputes.
