The Bankruptcy Threat in Debt Settlement Negotiations

When attempting to settle a debt or otherwise negotiate with a creditor, the bankruptcy threat is a potent weapon. The credible threat of bankruptcy from your attorney can induce a creditor to reconsider his position during negotiations.

Creditors More Willing to Negotiate If You Are Willing to File Bankruptcy

Suppose you want to settle a debt for less than is owed. Do you think the creditor will respond more favorably to a promise, a warning, or a threat?

You may start with a promise. “I promise that I will pay you 65% over the next three months to settle this account in full.” The creditor declines your offer.

So you issue a warning. “If you do not accept my offer, I will file for bankruptcy.” The creditor remains unmoved.

You decide to escalate your position to a threat. “I have retained an attorney and will file bankruptcy this week if you do not accept my offer.” How the creditor responds depends upon whether the creditor finds your threat credible.

Game theorists define credible threats as those that one’s opponent believes you may actually follow through on. Non-credible threats are those that a rational person would not actually carry out, because it would not be in his best interest to do so. If your threat to file bankruptcy is not credible, then the creditor has every incentive to disregard it.

The creditor may even issue his own counter-threats if your bankruptcy threat is not credible. Your willingness to actually file bankruptcy is what makes the bankruptcy threat credible.

Hire an Attorney Who Can Make a Credible Bankruptcy Threat

You may simply want to settle your debt, and you may have no intention of filing bankruptcy. But hiring a bankruptcy attorney to negotiate settlement discussions sends a powerful message to your creditor: “If we cannot bridge this impasse, I have already hired the attorney who will file a bankruptcy for me.”

Bankruptcy attorneys and creditor collection lawyers alike understand this much: it is often much quicker and much less expensive for all parties to settle a debt rather than to bankrupt the borrower. The bankruptcy threat strengthens your position as a credible negotiator.