Should I Tell Creditors That I Plan to File for Bankruptcy?

Consider some of the pros and cons of providing creditors more information than necessary.

When you’re overwhelmed with debt, it’s common to get more calls from creditors than you’d like. Not only is it miserable to feel like your phone has been hijacked, but if you’re like most, you’d like the calls to stop. Unfortunately, telling your creditors that you plan to file for bankruptcy is unlikely to do the trick. They can continue to call. Keep in mind, however, that depending on your goals, another approach might work just as well, or perhaps even better.

What Do You Hope to Accomplish?

Usually, when you tell a creditor that you intend to file for bankruptcy, you do so to let them know that you don’t have any money and that it isn’t worth the effort to pursue you. But, that isn’t always the case. It's also common to use this tactic as a bargaining chip to work towards a lower debt settlement amount. Your particular motives and situation will help you determine whether it makes sense to let callers know that you’re contemplating bankruptcy.

(Learn more about the debt settlement process by reading Negotiating With Collectors on Unsecured Debts.)

When You Just Want the Calls to Stop

There’s no guarantee that threatening to file bankruptcy will stop annoying creditor calls. The only sure fire way to use bankruptcy to accomplish this is actually to file a case. That’s when an order called the “automatic stay” goes into effect and prohibits your creditors from making any attempt to collect a debt.

Creditors know this. In fact, you should be aware that if you tell a creditor of your bankruptcy plans, the creditor might increase its efforts to get money out of you before it’s too late. Ultimately, it’s impossible to predict what the creditor will decide to do.

That doesn’t mean that you don’t have options, however. Here are additional approaches to consider:

  • Hiring an attorney. If you hire a bankruptcy attorney, and you inform your creditor of that fact, the creditor will have to call your attorney instead of you. Some bankruptcy attorneys will accept a small down payment—perhaps as little as $100—as an initial retainer so that you can avoid the calls while saving the rest of your attorneys’ fees.
  • Ask the creditor to stop. Additionally, you can write to the creditor and ask it to stop calling you. Keep in mind, however, that you might want to know what’s going on with your account. Unless you’re judgment proof (you don’t have any assets the creditor can get), you might want to consider another alternative.

(For more information, read When You Can't Pay Your Bills: Ten Things to Know.)

When You Want to Negotiate Down the Debt

No one wants to file for bankruptcy. So it’s not uncommon to try to negotiate an amount you can afford to pay as a last ditch effort before doing so. The difficulty that this can present, however, is that you’ll usually want to be sure you can reach a “global” agreement (make a deal with all of your creditors) before committing yourself one way or the other.

One approach is to be upfront with creditors. For instance, you might tell them that you’d like to avoid filing for bankruptcy, but that you’d need all of them to agree to accept a lesser amount. This approach can work effectively—as long as it’s true, however.

You likely won’t be surprised to discover that creditors hear this—and other things—regularly. Because of this natural skepticism, there’s a good chance that you’ll be asked to provide proof of your financial situation before the creditor will consider reducing your balance (and that turning over the requested documents might come back to haunt you—more below).

Also, keep in mind that in the end, many people find filing for bankruptcy to be the better course of action. Specifically, biting the bankruptcy bullet can help you avoid paying more than necessary.

Not only can it be tough to reach agreements with all of your creditors, but you could find yourself in a worse position. For instance, if you settle with a few, but not all, and end up filing for bankruptcy anyway, you’ll have paid out needless funds. Worse yet, you’ll likely have to pay taxes on any amount forgiven.

(Learn more in Tax Consequences When a Creditor Writes Off or Settles a Debt.)

When You Want to Change Payment Terms

Sometimes you just need time to catch up on your bills. If you’re in that position—say, for instance, that you’re recovering from an illness or getting back on your feet after a job loss—it’s probably a good idea to let your creditor know. You might qualify for a program that will give you the time that you need.

It’s likely that the creditor will require a significant amount of financial information proving your situation first. In fact, you’ll probably be asked to fill out an application and to submit bank statements and paycheck stubs. Understand that if you do, you’ll be giving away information that the creditor can later use against you. For instance, if the creditor sues you and gets a money judgment at a later date, the creditor will be able to use the information to levy (remove) funds from your bank account or garnish (take out) money from your paycheck.

(Get additional collection insight by reading Tips for Collecting Your Judgment.)

Sometimes It’s Best Not to Say Anything

Your problem will be solved once you file for bankruptcy. Until then, you’ll want to avoid giving the creditor any information that could be used against you later. So, if there’s nothing that you can do to resolve the issue—meaning, you don’t have the money to pay—and you intend to file bankruptcy soon, your best bet might be to say nothing, or simply avoid answering the phone.

(For more collection tips, see Handling Debt Collection Calls: Dos and Don'ts.)

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