If you can’t afford your credit card payments, bankruptcy might be a good option. Filing for bankruptcy is not a decision to take lightly. But once you’ve decided to move forward, paying certain debts such as credit cards is a waste of money. Whether it’s time to stop making payments will depend on:
• if you can afford to pay back the debt
• whether you’ve verified that you qualify for bankruptcy, and
• if a bankruptcy lawyer has given you the go-ahead.
Unless you’ve done the above, not paying your credit card bills could put you in a worse financial position.
Find out about these and other considerations. When contemplating bankruptcy, the first thing to consider is whether you can afford to pay off your credit cards. Why? Because if you make enough money to do so, you probably won’t qualify for Chapter 7 bankruptcy. If you have a lot of disposable income, the court will likely make you pay some or all of your credit card debt through a Chapter 13 repayment plan. Next, before you stop paying your credit card debt, you’ll want to be sure that you qualify for bankruptcy. Once you stop, fees add up quickly, and if you don’t file, it might be hard to bring your accounts current. So you’ll want to confirm that you pass the Chapter 7 means test—the test required to qualify for Chapter 7. Or you’ll need to have enough income to support a Chapter 13 repayment plan. If you stop making payments on your credit cards, you’ll typically begin receiving numerous calls from the credit card company or its agents. The more delinquent you are, the more frequent and harassing the calls will become. For most people, the constant harassment from debt collectors leads them to consider bankruptcy relief. Depending on your assets and the amount of debt you owe, the credit card company (or a debt collection agency) could decide to bring a lawsuit to collect its debt. If the credit card company obtains a money judgment against you, it will be able to garnish your wages or go after your assets to satisfy the debt. If you’re facing a lawsuit or the credit card company isn’t willing to work with you, it might be time to consider your bankruptcy options. In both Chapter 7 and Chapter 13 bankruptcy, a debtor can protect or “exempt” property using bankruptcy exemptions. Bankruptcy exemptions vary from state to state. Also, what happens to “non-exempt” property that isn’t protected will depend on the bankruptcy chapter you file. So you’ll want to review your state’s exemption laws and consider the bankruptcy chapter.
How Bankruptcy Works In Utah
In Chapter 7 bankruptcy, the bankruptcy trustee will sell your non-exempt assets and use the funds to pay back your creditors. If you own a lot of property that you can’t protect with a bankruptcy exemption, filing for Chapter 7 bankruptcy might not be in your best interest. By contrast, if you file for Chapter 13 bankruptcy, you can keep all of your property. But you’ll have to pay your unsecured creditors (like credit card companies) an amount equal to the value of your non-exempt assets. The good news is that you don’t have to pay it all at once. You’ll pay it over three to five years, depending on the length of your repayment plan. In most cases, if you’re qualified to file for bankruptcy, making credit card payments is like throwing money down the drain. But if you’re still undecided or might not file your case for a long time, stopping your credit card payments can cause unnecessary damage. If you are planning on filing for bankruptcy, it might make sense to stop paying certain creditors. If you are about to file for bankruptcy relief, continuing to pay certain creditors is likely a waste of money. Plus many filers stop paying their debts and use the funds to pay a bankruptcy attorney a practice that is fine with the courts. Whether you should stop paying your creditors will depend on:
• the types of debt, and
• how soon you expect to file your case.
Types of Bankruptcy Debt
Bankruptcy doesn’t cancel all debt. You’ll also have to pay some obligations, called “secured debt,” if you want to keep the property that serves as collateral, such as a home or car.
Mortgage loans: Your mortgage is a secured debt. When you took out the loan, you agreed to give your lender a lien against the property, and the lien gives the lender the right to foreclose on your house if you default on your payments. When you file for bankruptcy, the discharge order which wipes out your obligation to pay qualifying debt eliminates your personal liability to pay the mortgage loan. It doesn’t remove the lien. Therefore, if you want to keep your home, you must continue making your regular mortgage payments during and after the bankruptcy. This is true for both Chapter 7 and Chapter 13. An exception to this rule exists if you are getting rid of a second or another junior lien through lien stripping in Chapter 13 bankruptcy. You can strip off a junior lien in Chapter 13 (not Chapter 7) if the value of your home is less than what you owe on the first mortgage.
Car loans: Similar to your mortgage, a car loan is a secured debt. If you want to keep your car, you must continue making payments on the loan. Some auto lenders will require you to enter into a reaffirmation agreement on the same terms as the original contract. You can take this opportunity to renegotiate the loan terms. Renegotiating works best if the creditor would prefer that you keep the car and you’re genuinely willing to let it go.
Credit cards: Credit card obligations are treated as general unsecured debts in bankruptcy. Your bankruptcy discharge will wipe out card debt. As a result, if you are about to file for bankruptcy, making credit card payments is typically a waste of your money. But be aware that if you don’t plan to file your case for a long time, stopping your payments can prompt the credit card company to file a lawsuit against you to recover its debt although you’ll be able to stop the litigation with a bankruptcy filing.
Medical bills: Overwhelming medical debt is one of the most common reasons people file for bankruptcy relief. Luckily, medical bills are general unsecured debts like credit card obligations. Similar to credit cards, paying your medical bills prior to filing for bankruptcy will be a waste of time and money.
Alimony and child support: Domestic support obligations such as alimony and child support are non-dischargeable in bankruptcy. You can’t wipe out your obligation to pay these debts through bankruptcy. If you file for bankruptcy, you need to continue making your ongoing alimony and child support payments. One benefit of Chapter 13 is that you can catch up on support arrearages in your repayment plan. In fact, you must pay them in full through the plan.
Utilities: You’ll likely want to continue making your payments on services you need such as your gas, electricity, water, and other utilities. You can discharge a utility bill in bankruptcy, but you can be charged a hefty deposit to continue service afterward.
Bankruptcy Timing
Before you stop paying your bills, you’ll want to be certain that you will actually file for bankruptcy. Why? Because late payments and fees add up quickly, and once you fall behind, it’s difficult to bring the accounts current. So you’ll want to be sure that you qualify for bankruptcy.
• Chapter 7: If you plan to file for Chapter 7, you’ll need to pass the means test in order to qualify for a bankruptcy discharge.
• Chapter 13: In Chapter 13, it’s less about qualifying and more about having sufficient income to make the required monthly plan payment to your creditors.
Both of these calculations can be difficult and you’ll want to certain of your status. The easiest way to determine your qualification is by meeting with a local bankruptcy attorney. Many will review your case at a free consultation.
What Bills Should Stop Paying Before Filing?
If your credit situation has deteriorated to the point where you’re considering filing for bankruptcy, then you have a few more choices to make. One of the most important ones is whether or not you will file under Chapter 13 or Chapter 7. For those who have a great deal of unsecured debt like medical expenses or credit card bills, Chapter 7 will likely be the best choice. For those who have a lot of secured debt (mortgage payments or car loans) Chapter 13 provides the better option. In some situations, even those who qualify under Chapter 7 may consider Chapter 13. This is because you won’t take as much of a hit on your credit report, but the repayment plan has to make financial sense.
Credit Card Bills
One of the things that some debtors do is maintain payments on one credit card while allowing other debts to go into default because they want to keep that credit card after bankruptcy. But the reality is once the debtor files bankruptcy, they can kiss their credit card account goodbye. The credit card company will close out the account and mark it as discharged in bankruptcy. This is true regardless of whether or not you file under Chapter 7 or Chapter 13. Chapter 7, of course, discharges credit card debt against assets that the bankruptcy trustee can liquidate. Chapter 13 involves a repayment plan. But certain debts are prioritized over others and unsecured debts tend to be prioritized the lowest. Even if you do end up having to repay some of your unsecured debt, it doesn’t make sense for you to continue making payments on it outside of the Chapter 13 plan. Either way, you should stop paying credit cards before filing bankruptcy.
Medical Expenses
Medical expenses are considered unsecured debt. If you’re being harried by a creditor who represents a hospital and have been making payments on this debt, you should stop if you’re considering bankruptcy. Don’t feel bad. More Americans are driven into bankruptcy by medical debt than by any other kind of debt that you can think of. They end up with exorbitant bills because they got into a car accident with an underinsured driver and have missed work for an extended period of time. It’s horrible luck and it isn’t your fault. Bankruptcy will give you a fresh start.
House or Car Bills
If you know you’re going to file bankruptcy and that you’re not going to keep your house or car, stop paying on them. Once again, it makes no sense to waste your cash on making payments on something you don’t plan to use after bankruptcy anyway. Many debtors feel guilty about discontinuing payments even if they are going to file bankruptcy; but there is nothing immoral or unethical about discontinuing payments. Remember, this is debt forgiveness; it is okay to walk away. The mortgage company and finance company will write off their debts. Bankruptcy stops your creditors from taking these actions so you do have some wiggle room here. Additionally, it prevents unsecured creditors from turning your debt into secured debt by placing a lien on your real estate property. So, if you know you’re going to lose the house or car anyway, then by all means, stop making payments. If you want to keep these, then you’ll have to figure out a way to roll this debt into your Chapter 13 repayment plan.
Utility Bills
If you’re filing for bankruptcy, you may want to stop paying your utility bills only if they are already delinquent. And in that case you may only want to pay for your current usage if you’re at risk of a disconnection. Once you file bankruptcy, your gas, electric and Water Company will not be able to disconnect your service for non-payment of bills prior to your bankruptcy. However, if you file bankruptcy and fail to pay your utility bill for usage after you file bankruptcy, you can lose services. Utilities such as cable television and internet service are not governed by these rules. After filing bankruptcy on your cable television or internet service bills, it is possible that those services may be cut off for non-payment. In that case you may just search for another service provider.
Federal Student Loans
Federal student loans play by their own rules and can’t be discharged in bankruptcy. You should continue to make payments on these if you can. On the other hand, filing for bankruptcy will temporarily stop creditor actions against you. This, however, won’t last. You can, logistically, roll your student loan payments into your Chapter 13 bankruptcy. You will not have to repay your entire student loan within your three or five-year plan. Never fear, your student loan debt will still be there once you’ve completed your Chapter 13 or had your other debt discharged in Chapter 7. There are some cases in which you can appeal to a bankruptcy judge for a hardship exemption. For instance, if you have an ongoing debilitating ailment you may be able to get your student debt expunged. The burden of proof, however, is on you to show cause. Loan forgiveness is not granted easily.
Back Taxes, Child Support, & Spousal Support
Much like student loans, none of the above can be discharged in bankruptcy. You may be able to arrange something with the IRS when it comes to a repayment plan, but there’s simply no way around paying child support or spousal support. Each of these can, however, be rolled into a Chapter 13 repayment plan. They are given precedence over other kinds of debt. That does, however, mean that you can discharge them through Chapter 13. It simply means they are considered in the Chapter 13 repayment plan. It’s important to understand that you don’t have to be late on credit card payments to file bankruptcy. But at the same time, if you are really facing a hardship and are struggling to make ends meet each month then it is absolutely ok to fall behind on payments before filing bankruptcy. If you are struggling to pay your bills every month, then filing for bankruptcy may be a good option to help you. If you have judgments against you, or creditors harassing you, filing a Chapter 7 bankruptcy can help you by eliminating your debts. If you don’t qualify for a Chapter 7 bankruptcy, then you may need to look into filing a Chapter 13 bankruptcy instead. Most people use bankruptcy as a last resort. Most people who are thinking about filing for bankruptcy are worried that if they fall behind on their credit cards before filing their case, their credit will be ruined forever. Falling behind on your credit cards right before filing bankruptcy really won’t have much of an impact on your credit score. Bankruptcy is a tool that people use when they can’t make ends meet. If you are able to pay your creditors each month without facing any hardship, then you’re probably not a good candidate for bankruptcy relief. However, if can’t pay all of your bills, you shouldn’t have to decide whether you should pay your visa credit card or buy groceries for your family. Instead of making monthly payments towards your credit cards use you’re hard earned money for necessities such as rent, food, transportation. You’ll need those things no matter what and using your credit card to pay for them just has you repeating the same cycle next month.
File Bankruptcy On Your Credit Cards Lawyer
If you are getting ready to file for bankruptcy, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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