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SECURED CLAIMS IN BANKRUPTCY: Can Disclosure by Borrowers Eliminate the Problem of Excessive Use

In his symposium paper, Alan Schwartz makes the point that although it may not be worthwhile for creditors with small claims to determine whether a borrower has created security interests that would subordinate their claims in the event of bankruptcy, the borrower could provide such information at low cost. Firms that have not created security interests would, Schwartz argues, have an incentive to bring this to the attention of lenders of small amounts in order to induce the lenders to lower their interest rates. This information would permit lenders with small claims to adjust their interest rates to reflect the existence (or non-existence) of particular security interests.

The implication of Schwartz’s analysis appears to be twofold. First, with respect to borrowers that already provide this information to creditors with small claims, the amount of nonadjustment may not be as large as we suggest, at least with respect to creditors with small claims. Second, with respect to borrowers that do not find it worthwhile to provide this information, we can infer that the amount of nonadjustment by creditors with small claims is fairly small because; otherwise, borrowers with little secured debt in their financial structure would have an incentive to notify creditors of that fact. easy payday loans

Of course, Schwartz’s point is applicable with respect to only one of the four groups of nonadjusting creditors—creditors with small claims. Clearly, notification would not cause involuntary, government, or prior creditors to become adjusting. The absence of borrower-notification would also not indicate that the amount of nonadjustment by these three other classes of nonadjusting creditors is insignificant.

This post was written by , posted on August 12, 2014 Tuesday at 3:50 pm