One common myth is that you can stop paying your bills after deciding to declare bankruptcy but this idea needs clarification.
You see, in a Chapter 7 bankruptcy case – an erase-your-debts-and-start-fresh bankruptcy – debtors are often advised to stop making payments on unsecured debts, like credit cards and medical bills.
Unsecured debts are discharged at the end of a Chapter 7 bankruptcy case, and paying these debts is just throwing good money away that could be used to help your family get back on its feet.
Likewise, it is pointless to continue to pay secured creditors if the debt will be discharged in a Chapter 7 case and the property will be returned to the creditor.
While these Chapter 7 situations are common, the application of this “stop payments” advice is narrow.
It is important to have a clear understanding of which bills to pay after your Chapter 7 bankruptcy case is filed.
Of course, every case is different and the specifics of your case and your debts should be discussed with your attorney.
However, in most Chapter 7 bankruptcy cases, payments for unsecured debts are generally stopped, while payments on secured debts and household expenses are continued.
When will you file?
The first consideration is, when will you file your bankruptcy case?
You need to know the exact date your attorney will file your case. When a client is filing bankruptcy within 30 days, there are very few repercussions to consider.
However, not every bankruptcy client can or should file their case immediately.
Some clients may need to wait in order to qualify for Chapter 7 or lower their plan payments in a Chapter 13.
Other clients may need to postpone filing to eliminate a potential preference payment issue.
Second, once you miss a payment you can expect collection calls. The creditor may call your home, your cell phone, or even your work phone to discuss your delinquency.
These calls are at best an annoyance, and often cause additional stress. Credit card bill collectors know that the more uncomfortable you are, the greater the likelihood that you will pay them.
Fortunately, once your bankruptcy case is filed, the telephone calls will stop.
Under the Federal Fair Debt Collections Practices Act, calls from third party collectors must stop when you hire a bankruptcy attorney.
Third, missed credit card payments will damage your credit.
While your bankruptcy case will substantially harm your credit, missed payments additionally harm your score and make it more difficult to improve your credit after bankruptcy.
Some bankruptcy attorneys recommend that their clients can stop credit card payments for six months or longer – until the client is on the brink of a legal judgment and even after! While the bankruptcy stops any lawsuit or collection action, and discharges the credit card debt, the bankruptcy will not erase the history of non-payment or the entry of a creditor’s judgment.
Finally, a few clients will decide to not file bankruptcy. Clients who stop making credit card payments and later change their minds about bankruptcy are left with late payments, fees, default interest rates, and collection harassment. It’s pertinent that you are filing bankruptcy before you decide to stop your creditor payments!
In a Chapter 7 case, you must continue to pay secured debts after filing bankruptcy or you may lose your property. If you fall behind on payments that come due after the case is filed, your creditor may foreclose or repossess after your case is closed.
If your case is a Chapter 13, you must continue your payments to secured creditors that arise after your case is filed. If you fail to make your “post-petition” house payments, the mortgage company could ask the bankruptcy court for permission to foreclose.
Equally important are insurance payments. If you fail to keep your secured property insured, the creditor may ask the court for permission to foreclose or repossess. The same is true for post-petition rent payments to a landlord.
Dischargeable unsecured debts, like medical bills and credit cards, will generally be included in your discharge. Unsecured debts are financial obligations that are not backed by property. A signature loan is unsecured, while a car loan is usually secured by the car.
If you don’t pay, the bank repossesses your car. Because your unsecured debts will be discharged by the bankruptcy court, the only negative consequence to not paying unsecured debts before bankruptcy is creditor harassment (which usually stops after hiring a lawyer) and negative credit entries.
After the bankruptcy case is filed, the creditor is prohibited from reporting anything negative on your credit report other than the inclusion of the debt in your bankruptcy.
Utility bills and household expenses should be paid. This includes your rent, your cell phone bill, your electric bill, etc. If you are behind on these bills and need time to catch-up, speak with your attorney regarding legal options.
Monthly bills that are incurred after your bankruptcy filing date are not included in the bankruptcy case.
It is important to pay secured debts that you wish to keep, such as your home mortgage or a vehicle loan. Failure to make these monthly payments may result in repossession after the bankruptcy case is concluded.
Again, if you have trouble making these payments, speak with your attorney.
Finally, domestic support obligations such as child support must be paid. Likewise, it is a good idea to continue any non-dischargeable court-ordered payments.
The best advice is to discuss future creditor payments with your attorney when you sign your bankruptcy case. Your attorney can identify creditors that should be paid, and those that you can stop paying right away.
It’s important to do everything by the book but at the same time to know your rights!