OpenAI released their chat AI, ChatGPT, and within a week, millions of people were using it to do things like write rap music and lose weight. We’ve decided to put ChatGPT to the test with a common bankruptcy question and grade the result:
What are 10 reasons lenders don’t like filing claims in the Bankruptcy Court?
ChatGPT AI Answer:
There are several reasons why lenders may dislike filing claims in bankruptcy court:
1. Cost: Filing a claim in bankruptcy court can be costly, as there are fees associated with the process.
- Incorrect. There are no fees associated with filing claims through the Bankruptcy Court. However, filing claims is costly in the amount of time spent in the process. Many lenders can easily reduce this cost by considering the different monetizing options available to them when a borrower files. Companies like ours can streamline the process and save staff time.
2. Time-consuming: The bankruptcy process can be lengthy, and lenders may have to wait a long time to receive payment on their claim.
- Spot on. Many lenders, especially in the unsecured space, wait months or years to see Chapter 13 claims pay off. Sometimes claims pay nothing at all. Because of this, some lenders prefer to sell their claims for money they can immediately use to continue funding loans and growing their businesses.
3. Uncertainty: There is always a risk that the bankruptcy court will not allow the claim, or that the lender will receive less than the full amount of the claim.
- True. Lenders who are careful and organized can avoid denied claims, but there is a lot of uncertainty about the payout. In our experience, there is a wide range of payouts. Some lenders get a full payout, some get a portion of the amount owed, and others get nothing.
4. Reputation: Filing a claim in bankruptcy court may damage the lender's reputation, as it may be seen as a sign of financial distress.
- Mostly false. All lenders experience bankruptcies in their portfolios, and filing claims is not a sign of financial distress, but often indicates creditors know the rules under which they are operating and actively take part in the court’s process. However, some lenders choose to outsource bankruptcy processes because they don’t want to risk harming their reputation with any possible reputation-damaging debt collection.
5. Loss of control: Once a claim is filed in bankruptcy court, the lender loses control over the debt and must rely on the court to determine the outcome.
- False. The lender loses most of the control over the debt when the bankruptcy case is initially filed. Filing a claim is one of the few things lenders can do to improve their outcome when a case is filed. Lenders who actively participate in bankruptcy cases are turning the court system into their collection agency. There are certain rules to follow (which can be automated), but lenders can accurately predict the outcomes based on those rules.
6. Negative impact on credit: Filing a claim in bankruptcy court may have a negative impact on the lender's credit rating.
- Fake news. Filing claims has no negative impact on a lender’s ability to secure credit.
7. Limited recovery: In some cases, the lender may not be able to recover the full amount of the debt, even if the claim is allowed.
- True. Many lenders don’t recover the full amounts from bankruptcies. Lenders who don’t file claims guarantee zero payouts. Lenders who do are eligible to get paid.
8. Limited options: Filing a claim in bankruptcy court may limit the lender's options for recovering the debt, as the borrower may not have the means to pay the full amount.
- False. When a borrower files for bankruptcy, the Court is in charge of dispersing debts. Regardless of the status of the claim, lenders don’t have any options to recover the listed debt outside of the Court.
9. Complex process: The bankruptcy process can be complex and may require the lender to engage legal counsel, which can be costly.
- Correct. Establishing bankruptcy processes is complex. However, BankruptcyWatch regularly helps lenders build their operations, and we are happy to refer legal counsel.
10. Negative emotional impact: Filing a claim in bankruptcy court can be emotionally taxing for both the lender and the borrower. It may be difficult for the lender to accept that the borrower is unable to pay the debt in full, and the borrower may feel overwhelmed and stressed by the process.
- True. We have definitely seen this happen. Bankruptcy can be a tough scenario for all parties involved. The increased paperwork and decreased recovery can take a toll on lenders. Thankfully, there are some amazing resources like BankruptcyWatch services, NDC, and trustees that help make the process easier for lenders.
Overall, ChatGPT got 5 out of 10 of the answers correct. The performance is on-par with many bankruptcy specialists who don’t have the proper tools and training, but we give it a failing grade. Bankruptcy processes are too important and involve too much money to get wrong.
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