Do creditor rights amplify or mitigate the macroeconomic consequences of credit cycles? 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, lower stocks of non-performing loans, and a greater reallocation of credit away from risky borrowers. Firm-level evidence from the staggered adoption of antirecharacterization laws across U.S. states shows that well-protected creditors cut credit to risky firms with poor growth prospects, while easing credit constraints for productive firms. Our findings suggest that stronger creditor rights can enhance macroeconomic stability by facilitating a more efficient reallocation of capital.