Some people believe telling their creditors they plan to file bankruptcy will stop collection efforts or help them settle their debt. This often isn’t the case though. Telling your creditors about a pending bankruptcy filing can have negative consequences like repossession or ramped-up collection efforts. Read this article to learn more about the pros and cons of telling your creditors that you plan to file bankruptcy.
Written by Attorney Paige Hooper.
Updated April 6, 2022
If you’re considering bankruptcy, you may wonder whether you should let your creditors know. The answer is: It depends. The law doesn’t require you to notify your creditors before you file bankruptcy, but you may choose to tell some or all of them. Whether notifying your creditors is a good idea depends on the creditor, type of debt, account status, and what you hope to accomplish.
This article covers common reasons you may want to notify a creditor about your upcoming bankruptcy and the risks of doing this. We’ll also talk about how to ensure all your creditors receive the proper notice from the court once you file your case.
What Do You Want To Accomplish By Notifying Your Creditors?
Whether you should tell your creditors that you’re planning to file bankruptcy depends, in part, on your goals. What outcome do you want to achieve by telling your creditors about the bankruptcy? In some situations, notifying your creditors might not accomplish the effect you’re hoping for. Below are some possible reasons you might want to let your creditors know about your bankruptcy, as well as how your creditors might respond to this notice.
Stopping Collection Efforts
People file bankruptcy for many reasons, but they all have one thing in common: they need debt relief. If your debt burden has become unmanageable, you’re likely receiving a lot of collection calls and demand letters from your creditors. Many people tell their creditors about their bankruptcy plans in hopes of stopping some of these collection actions.
You might hope that the threat of bankruptcy’s automatic stay will stop the creditor from taking further action. Or you might think that if you tell the creditor you’re filing bankruptcy, they’ll realize that you don’t have any money and that more collection efforts would be a waste of their time.
Unfortunately, there’s no guarantee that notifying your creditors of your bankruptcy plans will stop phone calls or other kinds of debt collection. Bankruptcy protection doesn’t take effect until you file a case, and your creditors are aware of this. In most cases, if you tell a creditor you’re planning to file bankruptcy, the creditor will ask you for your bankruptcy case number, so they can verify that you’ve actually filed a case. Typically, unless you provide a valid case number, collection isn’t likely to stop.
Negotiating a Settlement
Another reason you might consider telling a creditor about filing bankruptcy is that you’re hoping to negotiate with the creditor to settle your debt for less than you owe. For unsecured creditors, bankruptcy could mean they get paid nothing. If they know you might be filing bankruptcy soon, an unsecured creditor may be more likely to enter a settlement or offer you better settlement terms.
Even for secured creditors, bankruptcy could mean getting paid substantially less than what you owe or even nothing (if you choose to give up the loan collateral). Also, for secured creditors, bankruptcy usually means they must hire a bankruptcy attorney or turn the loan over to their legal department. They may choose to work out a deal with you to avoid these possibilities.
Buying Time To Catch Up on Payments
If you’ve fallen behind on paying your bills because of a temporary setback, such as an illness or job loss, you may just need a little time to catch up as you get back on your feet. You may hope that telling a creditor you’re considering bankruptcy will temporarily stop collection actions and buy you enough time to bring your account current.
As discussed earlier, just telling a creditor about your bankruptcy plans usually isn’t enough to stop collection activities. In this situation, though, communicating with your creditor may be a good idea. Depending on the creditor, if you got behind due to a temporary problem, you may qualify for a program that will help you get caught up without needing to file bankruptcy.
To qualify for a lender’s mitigation, remediation, or assistance program, you’ll typically need to prove that you meet the program’s requirements. This might include providing financial information and documents like pay stubs and bank statements. But be careful: If you’re not eligible for the program or you can’t stick to the program’s payment plan, the creditor can use this information to garnish your wages or levy your bank account.
Potential Negative Effects of Notifying Your Creditors
Depending on your financial situation and goals, letting your creditors know you’re considering bankruptcy may or may not achieve what you’re hoping. In some cases, notifying your creditors about bankruptcy can also lead to negative consequences, so be aware of these possible effects.
For example, a creditor that learns you’re considering bankruptcy might accelerate collection efforts to collect as much as possible before the automatic stay takes effect. Or, in anticipation of the bankruptcy, they might turn your account over to their legal department. This could ruin your chances of negotiating a debt settlement or entering a remediation program. It could also result in having legal fees added to your balance and possibly a final attempt at a wage garnishment or bank levy.
Or the creditor may decide that collecting from you isn’t worth the effort, especially with bankruptcy on the horizon. This may result in a temporary pause in collection activity, which can feel like a win — but it usually isn’t. Instead of just writing off your debt, the creditor will most likely sell it to a third-party debt collector or collection agency. This means another negative listing on your credit report, as well as future collection efforts that might be more aggressive than the original creditor’s tactics.
Finally, if you’re behind on a secured debt, such as a car loan, telling your lender you plan to file bankruptcy may motivate them to repossess the collateral. Repossessing your property before you file bankruptcy lets your secured creditor avoid the complication, delay, and extra paperwork that bankruptcy can cause.
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When You're Ready To File Bankruptcy, Preparation Is Key
You’re not required to notify your creditors before you file bankruptcy. Once your bankruptcy case is filed, though, the bankruptcy court sends a notice to all of your creditors. It’s your job to provide the court with a complete list of all your creditors, along with their correct mailing addresses. Taking the time to gather all the necessary information before you file will help the bankruptcy process — including notifying creditors — run more smoothly.
Choose the Right Type of Bankruptcy
Most people file bankruptcy under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Both Chapter 7 and Chapter 13 can eliminate or dramatically reduce unsecured debts, such as medical bills, credit card debt, personal loans, and old utility or cell phone bills. Neither type of bankruptcy can eliminate alimony, child support, or federal student loans.
But there are important differences between the two chapters. These differences can affect what information you need about your creditors and how your creditors will interact with the bankruptcy court regarding your case. Filing the wrong type of bankruptcy can result in big headaches. It could even cause you to lose property you wanted to keep or prevent you from getting a bankruptcy discharge.
Chapter 13 bankruptcy focuses on reorganizing your debts into a three-to-five-year repayment plan. If you’re behind on secured debts, such as your mortgage payments or car loan, Chapter 13 can help you avoid foreclosure or repossession. This chapter is also a good choice for filers who have too much income to qualify for Chapter 7 or who have assets that aren’t protected by the applicable bankruptcy exemptions. Chapter 7 bankruptcy provides a fresh start by eliminating unsecured debts for people who qualify under the Chapter 7 means test. The Chapter 7 process is much faster and generally less complicated than Chapter 13.
In some cases, you may be able to file Chapter 7 bankruptcy on your own. To complete a Chapter 13 case, though, you’ll probably need an attorney. If you’re not sure which type of bankruptcy is right for you, seek legal advice from an experienced bankruptcy attorney. Most bankruptcy lawyers offer a free consultation. Whether you file bankruptcy on your own or with a lawyer, you’ll still need to gather the necessary information about your creditors before you file your case.
Gather All Your Creditor Information
Before you even begin filling out your bankruptcy forms, you should create a list of all your creditors. This includes original creditors as well as debt collectors and collection agencies. Bankruptcy law requires you to list all your creditors and all your debts, including debts you plan to pay, so don’t leave anything out. It usually helps to review your credit report from one or all three credit bureaus to make sure you’ve included everything.
For each creditor, you’ll need a current mailing address and the approximate balance you owe. If you’re filing a Chapter 13 case, you’ll likely also need your account number and other information, such as your interest rate. The more accurate this information is, the easier your bankruptcy will be. Incorrect addresses and missing information can cause delays in your case and may prevent creditors from getting proper notice. If you choose to tell your creditors about your bankruptcy plans, ask if there is a bankruptcy department or preferred mailing address you should use.
You (or your attorney, if you have one) will use this information to complete the bankruptcy forms that you file with the court. In addition to these forms, you must also submit a creditor mailing matrix to the court when you file your petition. The matrix is a list, usually alphabetical, of all your creditors and their mailing addresses formatted according to your court’s rules. The court uses this matrix to create mailing labels to send notices to your creditors.
What Happens After You File the Bankruptcy Petition?
When you file a bankruptcy petition, the automatic stay goes into effect. Bankruptcy law requires creditors to stop all collection action against you once they receive notice of your filing. The bankruptcy court automatically sends out a notice of the bankruptcy filing to all your creditors, using the names and addresses on your matrix. This is one of the reasons that providing complete and accurate addresses on your matrix is so important.
If one of the addresses on your mailing matrix is wrong or outdated, the notice will be returned. If this happens, the bankruptcy court will send you (or your lawyer) a Notice of Undeliverable Mail. In this situation, it’s your job to find the correct address for that creditor. The Notice of Undeliverable Mail contains instructions for how to update the address once you have the correct information. If a creditor doesn’t receive court notices, they could continue with collection against you. They also won’t be able to file a proof of claim, which is especially important in a Chapter 13 case.
You aren’t required to tell creditors that you’re planning to file bankruptcy. Based on your situation and goals, you may still choose to notify certain creditors. Keep in mind, though, that this could lead to negative results such as repossession or increased collection activity.
In most cases, the risks of notifying your creditors tend to outweigh any potential benefits. Until you file your case, it’s often best to keep your plans to yourself. You should still work on gathering current contact information for all your creditors, though. Once your bankruptcy is filed, the court will use the information you provide to notify all your creditors about the case.