Repaying Debts Before Filing Bankruptcy Is A Bad Idea
January 5
Many debtors who are facing bankruptcy choose to repay their credit card or another debt prior to filing bankruptcy, even though this sounds counterintuitive. It is assumed that people file bankruptcy because they need to eliminate debts. The decision to repay some debts before filing could result in many unfavorable and unpredicted consequences.
Please note that this text is not, nor is it intended to be, legal advice. It is presented only for the sake of information. Every case is unique and the wisest thing to do is consult an experienced bankruptcy attorney.
Even if you pay off the credit card, your account will be closed
A common misconception is that a credit card company will allow a debtor to use the account after the bankruptcy if the card was paid off beforehand. However, quite the opposite is true. Even if the individual lists the credit card company or owes them money, the company will nevertheless close the account after bankruptcy.
If an individual really wants to keep the account open, that is more likely if they owe the company money and agree to repay them by reaffirming the agreement. In such a situation, the credit card company is incentivized to continue the cooperation. However, this is not quite recommendable.
Some debts may not be discharged
There is something that most don’t foresee and it can happen in a Chapter 7 case.
The law allows the bankruptcy trustee to recover all preferential payments that took place within 90 days prior to declaring bankruptcy. Payments exceeding $600 and issued to creditors in the period of 90 days prior to bankruptcy can be understood as preferential.
Debts repaid to family members and other people close to the debtor can also be recovered, even if they were made up to one year before the bankruptcy was declared.
Debtors usually care whether their close ones get sued for recovery but would they care if their credit card company was sued? Probably not. However, this is not the end of the issue.
Chapter 7 cases – asset and no-asset
In no-asset Chapter 7 cases the trustee doesn’t liquidate and disburse the assets. The debtor gets discharged of dischargeable debts disregarding the fact whether the creditor was listed or received the bankruptcy notice or not.
Unfortunately, many people don’t know for sure all the creditors they owe to, sometimes because they are insufficiently organized and other times because the creditors sold their accounts and so on.
If it happens that the trustee recovers preferential payments made 90 days or one year prior to bankruptcy, the case turns from a no-asset one to an asset one. Consequently, an accurate list of creditors suddenly becomes very important. In asset cases, creditors who are not listed, or are listed with incorrect contact details could be left undischarged – meaning the debtor could still be responsible for paying those creditors out after the case completes.
Bankruptcy lawyer in San Diego
All potential clients who need a professional opinion about their case are welcome to get a free initial consultation with Chang & Diamond, APC at (619) 312 – 4900 and (800) 718 – 8118. Chang & Diamond, APC. have a vast experience and expertise in bankruptcy and consumer bankruptcy, which enable them to asses cases precisely and extend their knowledgeable and compassionate opinion.