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

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. However, remember 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're hoping that letting them know you don't have any money will get them to stop pursuing you. It's also common to use this tactic when working towards a lower debt settlement amount.

Your particular motives and situation will help you determine whether it makes sense to let callers know 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

Threatening to file bankruptcy doesn't stop annoying creditor calls. In fact, most creditors step up the collection efforts hoping to get paid before you file. They know they'll get less if they wait for bankruptcy because all creditors must share any available assets.

The only surefire way to use bankruptcy to stop calls is by actually filing a case. That's when an order called the "automatic stay" goes into effect and prohibits your creditors from attempting to collect a debt.

Other Ways to Stop Calls

Here are additional approaches to consider:

• Hiring an attorney. If you hire a bankruptcy attorney and inform your creditor of that fact, the creditor will have to call your attorney instead. 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 calling you. If you write to the creditor and ask it to stop calling you, the creditor must discontinue the contact.
• Unplug your phone. If you're "judgment proof" and don't have any assets the creditor can get, you might want to stop answering calls. This approach often works well for seniors relying solely on Social Security income (it's protected from creditors) who don't own much property.

Learn more about senior citizens and bankruptcy.

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. However, the difficulty that this can present is that you'll usually want to be sure you can reach a "global" agreement or 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.

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 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, many people find filing for bankruptcy to be the better course of action. Specifically, filing for bankruptcy can help you avoid paying more than necessary. It can 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 file 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 necessary time.

The creditor will likely require significant financial information proving your situation first. In fact, you'll probably be asked to fill out an application and 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 later, the creditor can 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.