Some people think of bankruptcy as a personal failure, but the truth is that a healthy economy needs a bankruptcy system. The bankruptcy code does not just provide relief to debtors; it also provides relief to creditors.
Imagine if multiple creditors were all filing claims against the same individual. Whichever creditor got there first would pick their bones dry and leave nothing for the others. The creditors would each individually benefit from resolving their problem in an orderly fashion, but the lure of benefiting more than other creditors propels them to act aggressively and take as much as they can get. In other words, the whole issue becomes a race to see who gets there first.
Bankruptcy stops the vulture buffet and allows the trustee to handle creditor claims in a fair way. That means that no individual creditor is placed above another in terms of priority. Instead, certain types of debt are given priority over others.
When a debtor files for bankruptcy, the vulture buffet stops in its tracks. Creditors can no longer initiate collection actions against debtors, and the dispute is taken up by the trustee, who represents the interests of all the creditors as opposed to one creditor seeking recovery of a debt. In a system that allows a vulture buffet, you have one insolvent debtor, and all but one of the creditors are also insolvent. It is bad for everyone except the one creditor that moved quickly enough to capture the debt.
Is the Bankruptcy System Bad for Debtors?
Well, no. Debtors get a fresh start, and they are allowed to discharge the debts they owe and move forward with peace of mind. The downside is that the bankruptcy remains on their credit report for the next 10 years. In most cases, however, debtors can rebuild their credit properly and avoid future bankruptcies. Lenders are not going to look back 10 years if your credit score is over 750.
The downside of the bankruptcy system is that it increases the risk for lenders, who must account for the percentage of bankruptcies likely to be filed on their loans. Banks will generally avoid lending to high-risk individuals, and it will raise the interest costs for everyone. So there is a downside for debtors, but it is substantially better than debtors’ prison, indentured servitude, or the compelled bankruptcies that existed before modern bankruptcy law.
Our economic model is based on the belief that individuals operating in accord with their own good will create a synergy of good that improves the lives of everyone. However, as in vulture buffet, sometimes, the system doesn’t work that way, and what is good for the individual ends up being not so good for the economy at large. Hence, why the bankruptcy system is in place and operates the way that it does. It is a tradeoff.
Talk to a Pennsylvania Bankruptcy Lawyer Today
Chris Arrington represents Pennsylvania debtors in bankruptcy cases. Call today to schedule an appointment, and we can begin discussing your options immediately.