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How Bankruptcy Can Help You Negotiate with Creditors

When it is feasible, negotiating with creditors is an excellent alternative to bankruptcy that allows troubled borrowers to resolve debt while minimizing credit consequences. But negotiation requires leverage. If the amount or validity of a debt is not in dispute, a lender usually has no incentive to negotiate.

The prospect of bankruptcy, however, can give creditors the incentive they need to start dealing with borrowers who want to renegotiate debt. This is because creditors who are involved in a bankruptcy more often than not receive less from the lender than what their contracts provided. When bankruptcy becomes a possibility, the amount the creditor could receive suddenly becomes an issue. This is especially true for creditors whose claims have low priority. These lenders can expect to receive substantially less — or nothing at all — if the debtor declares bankruptcy.

When a borrower demonstrates that he or she qualifies for bankruptcy and is prepared to file, this can sometimes open up avenues for negotiation that did not previously exist. Creditors usually do not want to be drawn into bankruptcy proceedings and may be willing to negotiate if they believe that the borrower has the capability to pay. Negotiating with debtors outside of bankruptcy gives creditors more freedom and also saves them money in legal fees.

Of course not every creditor is amenable to negotiation, even under these circumstances. Some particularly aggressive creditors may even try to force borrowers into bankruptcy in order to recoup at least a portion of the money owed. In these cases, debtors should promptly consult an experienced bankruptcy lawyer to ensure their rights are protected.

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