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Why do governments allow individuals to file for bankruptcy?

Given only a very cursory review, bankruptcy may not seem like a very good practice for a nation's economy. A reader of this New York bankruptcy law blog may think that if individuals are able to excuse or erase their loans with relative ease that the credit industry would dry up and commerce across a nation may be thwarted. However, from an economic perspective, there are a few strong reasons for why governments allow their citizens to file for personal bankruptcy.

First of all, bankruptcy protects consumers from creditor threats. If, for example, a person could not pay off his debts and he had no remedy for settling his outstanding obligations, he would be at the mercy of his creditors for closing out his delinquent loans. As all of his creditors would want payment they may harass him, each set on being the creditor that gets paid before the debtor runs out of funds. In essence, bankruptcy protects debtors and ensures that all creditors are addressed.

Second, bankruptcy gives individuals a way to manage the financial changes in circumstance that they are subjected to and that are outside of their control. When, without warning, a person loses his job, he may find that he is unable to pay his bills. If the stock market was to crash and a person lost his life's savings over the course of a day, he may find that he cannot maintain his financial obligations. Bankruptcy offers an individual a tool for taking control of circumstances that he did not create.

There are many other reasons that explain why governments allow their citizens to apply for bankruptcy protections. Bankruptcy can provide stability when financial uncertainty arises. Individuals who are interested in learning more about how their financial interests may be served by bankruptcy may seek out the counsel of bankruptcy professionals.

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