Using the Possibility of Bankruptcy to Negotiate with Creditors


People struggling with debt often too easily discount the possibility of negotiating with their creditors. To them, the bargaining power seems so unequal that they cannot comprehend why their creditors would ever be willing to negotiate. However, it is easy to forget that creditors have quite a bit to lose in bankruptcy as well. Sometimes the appearance that a debtor is teetering on the edge of bankruptcy is enough to convince previously inflexible creditors to reconsider.

When a debtor files for bankruptcy, especially under Chapter 7, creditors stand to lose a significant portion of their claims. This is a risk that many would rather avoid. However, idle threats of bankruptcy are usually not persuasive. Still, if a creditor can be convinced that certain conditions exist, it may become more amenable to compromising the terms of repayment or even forgiving a portion of the debt:

  •     The debtor qualifies for bankruptcy.
  •     The debt is of a type that is dischargeable.
  •     A bankruptcy proceeding would likely result in the creditor receiving significantly less than what is owed.

Bankruptcy can have a serious effect on creditors under many circumstances. Even if their claims are preserved, collection may be greatly delayed. However, presenting this to a creditor in a compelling manner can be difficult. Many do not fully understand the bankruptcy process and even those that do may remain skeptical. When your financial situation is presented in a clear and forthright manner by a reputable bankruptcy attorney, some creditors may be swayed into compromising, not out of compassion, but out of business necessity.