Continuing our discussion on “Crazy Stuff Collectors Say,” in this post I’ll deal with a common statement made by collectors.
In the first post in this series, I wrote about the myth of “bankruptcy insurance,” where the collector attempts to convince the debtor that the creditor actually *prefers* they just go ahead and file bankruptcy, rather than agreeing to a settlement, because the creditor supposedly has insurance that will cover bankruptcy-related losses. It’s a load of hogwash, of course, and there is no such thing as bankruptcy insurance. The purpose of the false statement is to reach into the debtor’s head and remove the perceived leverage that comes with the right to file bankruptcy.
Along the same lines, there is another similar statement frequently made by collectors. I first heard this one many years ago, when I was trying to settle a debt on behalf of a client. I explained the client would be forced into bankruptcy if they could not achieve settlements across the board with their creditors. The collector proceeded to tell me that he would “race” my client to the filing, file a lawsuit, and get a judgment before the client could file for bankruptcy. So they would have their judgment and the client would need to pay up anyway. I nearly fell out of my chair laughing. When I recovered, I informed the collector he needed to go back for additional training. What he was attempting to do was use a technique on a professional negotiator that no pro would fall for.
Lately, I’ve had clients report similar statements made by debt collectors. When the debtor explains they are seeking to avoid bankruptcy by using settlement as an alternative, the collector makes the claim that they will quickly get a judgment and then the debtor will be on the hook even if they filed bankruptcy. They try to convey the impression that once a judgment is recorded, an unsecured debt becomes like a secured debt that cannot be dismissed in a bankruptcy.
Nothing could be further from the truth. The bottom line is very simple: Bankruptcy trumps civil judgments, period.
In fact, one of the main reasons people file bankruptcy is to put a stop to civil lawsuits by creditors, or to stop active wage garnishments! It doesn’t matter whether the bankruptcy is filed before or after the judgment is recorded. The bankruptcy attorney has to take the correct steps to overturn garnishments or liens that are in-force, but assuming the attorney does his or her job correctly, then the bankruptcy will include all judgments and put a stop to any in-process lawsuits. Further, the bankruptcy MUST include such judgments, because a bankrupt debtor doesn’t get to favor some creditors over others, and judgment creditors do not have priority over other creditors who have not sued.
So here again, we have a common pattern of debt collectors purposely misleading debtors in an effort to gain the psychological advantage in the negotiation. Don’t be fooled.
Creditors do NOT want you to file bankruptcy. That’s why thousands of settlements take place every day in this country. Further, collection agencies REALLY don’t want to see you go bankrupt, because any commission they might make will vanish at that point. Remember you DO have leverage in these negotiations. Don’t let a collector trick you into thinking otherwise.