Prisoner’s dilemma is a subset of game theory wherein the police arrest two men and accuse those men of being involved in the same crime. The police separate the men and place them in different prison cells so that each defendant does not know what the other defendant is telling the police. The men, now prisoners, have a choice – deny the accusations and compel the police and the government to prove that they committed the crime, or admit to the crime, thereby sparing the police and the government from an investigation. If a man chooses to deny the accusations, thereby triggering a court case, the court will be harsh against the man if he is found guilty. Being not guilty allows him to go free. If, on the other hand, the man chooses to admit to the crime, then he will definitely face a penalty, but will likely not face the full brunt of punishment.

Add in the factor that, in this instance, there are two men facing punishment and, according to the police, both committed a crime together. This means that each one knows about the other one. When separated, each can admit to the police and implicate the other in the crime. Each has a dilemma: Even if that person can successfully deny guilt, there is no way to communicate this to the other person. As a result, the best move may not be denying; instead, the best option is to admit guilt, thereby sidestepping the issue of the other person implicating you while preserving the ability for leniency in the penalty assessment.

Someone facing mounting debt faces the same issue and often the same type of result.

Consumer Bankruptcy, Prisoner’s Dilemma

When facing mounting debt, you may feel pressure that takes over your life. It may affect how you eat, how you sleep, how you interact with neighbors, and can be so pervasive that it is all you think about.

At the same time, you may be doing better with your business or job and feel that you can negotiate your way out of debt. Or perhaps you can obtain a consumer loan from Lending Club and the like to stave off collections.

On the other hand, paying a few hundred dollars here and few hundred there adds up to the point that paying off core debts is excrutatingly difficult. You therefore consider bankruptcy as an option because it provides you, upon completion of the bankruptcy, with the coveted discharge.

If you file for bankruptcy, you will definitely get a discharge but will have to deal with destroyed credit and a bankruptcy mark on your record for the next eight years. It would be difficult to get a car loan because your credit rating would be too low. Potential employers can legally refuse to hire you if you have a bankruptcy on your record. You would have to go through the bankruptcy process, which puts a bankruptcy judge on top of your finances. These are very serious concerns.

If you choose not to file for bankruptcy, you may sink further into debt. Creditors can come and put a lien on your house and car. Eventually, if your current trajectory continues, creditors may be able to take your house and your car. Bankruptcy, through the automatic stay, can stop this process and let you reorganize; outside of bankruptcy, no such mechanism exists.

This is a dilemma that debtors face all the time. Which is the better option?

A significant factor in any bankruptcy decision is asset protection. You may have worked hard for a number of years so that you can have a house, car, lifestyle, etc. Should you lose it all to debt because you had a few bad years?

This dilemma parallels the prisoner’s dilemma in some ways. Outside of bankruptcy, you can potentially achieve the most, though there is no guarantee that you will stave off a creditor from putting a lien on your house just as there is no way to guarantee that the other prisoner will not implicate you in the crime. Waiting to file bankruptcy to the point that creditors seized your possessions is the worst possible outcome, parallel to denying the charges only to get implicated later by your codefendant.

In many cases, the best scenario is to file bankruptcy now before your circumstances get worse. Each individual’s circumstance will dictate.

To speak with an attorney who understands your situation, speak with the debt relief firm of Melanie Tavare, an experienced Bay-area debt relief attorney.