UNIT 6
CREDITORS’ RIGHTS AND BANKRUPTCY
ANSWERS TO DISCUSSION QUESTIONS
1. Bankruptcy law attempts to provide a fair means of distributing assets in the debtor’s
possession to creditors, because on a debtor’s bankruptcy, the debtor’s obligation to pay—which is the
asset in the creditor’s possession—usually has diminished value and sometimes no value. For debtors
who “get in over their heads,” bankruptcy law attempts to provide relief and protection—a “fresh start.”
2. The rationale for the UCC’s “self–help” provision—under which creditors may take
possession of collateral on a debtor’s default without judicial process—is that it simplifies the process of
repossession and reduces the burden on the courts. The tradeoff is that debtors are occasionally ex-
posed to abuse and violence resulting from self-help repossessions. This can occur especially because
3. Bankruptcy is not easy for debtors (and seems to have become even less easy with the
Bankruptcy Reform Act of 2005). Many debtors feel a sense of shame and failure when they file a
petition. And there are certainly more concrete consequences—blemished credit ratings for up to ten
years, higher interest charges for new debts, and so on. A debtor may find it difficult to get a job
4. The text posits that when the number of bankruptcies increases, creditors incur higher
risks in making loans—because bankruptcy shifts the cost of the debt from the debtor to the creditor. To
compensate for these higher risks, creditors increase the interest rates charged to everyone, require
additional collateral, or become more selective in granting credit. Thus, with more lenient bankruptcy
5. Overdependence on credit and overconfidence in investment contributed to the most
recent U.S. recession and global economic crisis. Investors who indulged in both of these failings lacked