Do creditor rights amplify or dampen economic fluctuations? Using a panel of 39 countries from 1978 to 2019, we show that credit expansions in economies with strong creditor protection are followed by smaller output losses, fewer non-performing loans, and a greater reallocation of credit away from unproductive sectors. Firm-level evidence from Delaware’s adoption of antirecharacterization laws shows that well-protected creditors cut credit to low-productivity firms while easing borrowing constraints for productive ones. Overall, our findings indicate that stronger creditor rights dampen the output losses of credit booms by facilitating a more efficient reallocation of capital.