Quite often, when I am discussing a settlement proposal with a client, my client will say something to the effect of “tell them that if they don’t take my offer, I will file for bankruptcy and they will get nothing.”
My reaction to that idea is always the same: “Hold on there, Cowboy”.
While bankruptcy is certainly a tool that can be used to legally discharge debt, it doesn’t mean that all lenders will tremble in fear when they hear the word. In many cases, it is quite the opposite. In a nutshell, many workout officers do not care if you file for personal chapter 7 bankruptcy.
Why don’t they care? There are two main reasons:
1) If you file for and are discharged from personal chapter 7 bankruptcy, the bank no longer has the legal right to attempt to collect from you. In practical terms, it means that the workout officer can turn their attention to one of their other 100 files. And as a former workout officer, I can tell you that having one less delinquent loan to chase was just fine with me.
2) Most lenders do their own analysis of the situation, and if they think you can pay more than you are offering, they will reject the offer regardless of a bankruptcy threat. I can tell you that if I gave a borrower a “sweetheart” settlement when I was a workout officer, and was questioned about it later, the excuse that the borrower threatened to file for BK would not going over well.
So, do banks want to force you into bankruptcy instead of settling? No, not usually. With that said, workout officers are human beings with stressful jobs in a corporate environment. For most, that means they would be delighted to get rid of your file with as little time and effort as possible. And guess what, bankruptcy does just that!
The final point to ponder is that while most workout officer aren’t attorneys, many have a feel for who might actually qualify for personal chapter 7 bankruptcy. For those who are not aware, not everyone can file for chapter 7, you actually need to qualify based on your assets and income situation. If you look pretty strong on paper, many lenders will know that your threat to file for BK is a bluff, and they will not even blink.
At the end of the day, will the threat of filing for bankruptcy hurt you? Probably not. Just don’t expect your lender to say “Please, don’t file for BK. Anything but that! We’ll make a deal, we promise!”