Firms facing serious litigation can use bankruptcy as a negotiating tactic. We develop a dynamic capital structure model in which firms choose negligence levels that boost short-run profits but create litigation risk. The model reveals substantial risk-shifting: highly leveraged firms engage in excessive negligence because limited liability allows them to shift expected litigation costs to creditors and tort victims through bankruptcy. After estimating the model, we evaluate four policy regimes corresponding to recent legal debates. Legalizing Texas Two-Step bankruptcies, which shield firms from litigation with minimal consequences, would produce catastrophic increases in negligence and harm victims despite eliminating bankruptcy costs. Protecting tort victims in bankruptcy with either superpriority or enhanced bargaining rights improves outcomes modestly. Comprehensive reform combining both of these protections dominates: negligence declines, victim recovery triples, and firm equity values increase, as both productive investment and improved deterrence benefit shareholders.