How Bankruptcy Can Be Good For The Economy

The circumstances that lead to personal bankruptcy are never easy. Frequently, expensive medical care is to blame. Perhaps a business didn’t meet its financial goals, or maybe a person lost their job and couldn’t keep up with the bills. In some situations accidents or even natural disasters can lead to insurmountable credit problems. However, filing for bankruptcy in itself is not a problem. It is a solution. Bankruptcy can actually be good for the economy – both personal economies and even the national economy.

Before Bankruptcy

Prior to bankruptcy, there is a typically a lack of control or a clear plan. Debts are not being paid down and interest accumulates. As this process continues, the situation multiplies on itself and overall debt grows. There is an emotional component to this situation as well. Many people facing credit issues feel as if there is no solution. They can become anxious, depressed or overwhelmed with guilt. This only makes it harder to address the problem.

After Bankruptcy

Once bankruptcy filing begins, everything changes. The legal process offers a clear cut plan to improve the financial situation. This does not mean anyone is going to be left out on the street, as bankruptcy proceedings offer certain protections, such as retaining one’s home. Other non-exempt assets might have to be sold, but in the end all debt obligations are forgiven. In the meantime, there are other benefits, such as credit counseling and debtor education.

A good bankruptcy attorney can help locate and organize all the necessary financial documentation and help ensure the filing is completed properly and on time. Even though credit scores are affected by filing for Chapter 7 or Chapter 13, most likely the person’s credit rating has already been suffering. Seeking a solution means moving towards reestablishing a good credit score as quickly as possible. The reason that bankruptcy is good for a personal economy is because it restores order to the financial situation. Debts are wiped clean, and one is guided in making future financial decisions. Plus, the creditors are satisfied. A healthy economy needs order, and bankruptcy helps restore order to troubled finances.

The National Perspective

When we look at the situation from a national perspective we can see many parallels. When large numbers of people avoid personal bankruptcy, this can be harmful to the national economy. This happens when we multiply the “before bankruptcy” scenario mentioned above by hundreds of thousands of people. We end up with large numbers of persons accumulating interest on a debt that they cannot pay. This can lead to a major economic disruption because financial institutions form plans based on getting paid. Avoidance of facing credit issues on a big scale can cause ripples in the economy, and the financial crisis of 2008 was a perfect example.

As reported in The Wall Street Journal, during that time large numbers of persons filed for bankruptcy, and it was part of a process to put the country back on track financially. This helped put a stop to the downward spiral of ever accumulating debt that could not be paid off. The books are put back in order, and the creditors come away with terms that they find acceptable.


Many times the bankruptcy process is misunderstood. The negative connotation is undeserved since bankruptcy is a solution to a financial problem. That’s why the process is often referred to as “bankruptcy protection.” Contact Sirody & Associates for a FREE Consultation and advice from attorneys that specialize in bankruptcy law. Let our attorneys work to get you back on your feet.