I’m Going to File for Bankruptcy, Should I Stop Paying Creditors?
When you make the decision to file for bankruptcy, you may have many questions regarding what steps you should take before you file. Because bankruptcy is a federal proceeding, you may be intimidated by the process and want to make sure you don’t do anything that could either jeopardize your case or incur penalties.
One of the most common questions asked is regarding the payment of creditors when you realize you will need to file bankruptcy. The answer to this question depends on several factors.
If you have loans that are secured by property, such as a mortgage or vehicle loan, you should view them differently than debt that is unsecured.
In the case of a mortgage, your personal liability for the mortgage is eliminated when a bankruptcy is discharged, but it does not eliminate the lien on your property, which means the bank can sell it to recover its losses. If you have a second mortgage on your home, it is considered a junior lien, as your first mortgage is considered a higher priority than a second.
You should continue making payments on your first mortgage if possible throughout your bankruptcy process. However, you can discontinue making payments on a second mortgage as it will be eliminated through your bankruptcy.
If you want to keep your car, you will need to continue making payments. However, if you are filing Chapter 13 bankruptcy, you may be able to pay your vehicle payments through the repayment plan. This may also be true of your mortgage. In this case, you do not have to send separate payments to your creditors outside the bankruptcy payment.
Most credit cards and medical bills are both unsecured debt. According to a study conducted by NerdWallet Health, a division of a price-comparison website, nearly two million people were expected to file bankruptcy after incurring significant medical bills in 2013.
Both credit card and medical bills are discharged through your bankruptcy, so paying them prior to filing will not be beneficial. However, if you don’t plan to file for bankruptcy for several months, discontinuing payments to credit card companies, and sometimes even healthcare agencies, could lead them to file a lawsuit against you in an effort to recover the debt.
Alimony, Child Support, Tax Liens and Student Loans
Alimony and child support are not discharged through bankruptcy. Chapter 13 bankruptcy will allow you to include any arrearage in your repayment plan, however. In order for tax debt to be discharged, you must meet all of the following conditions:
- The taxes are income taxes;
- You did not file a fraudulent return to willfully evade paying taxes;
- The debt is at least three years old;
- You filed a tax return; and
- The debt must have been assessed by the IRS at least 240 days before you file for bankruptcy.
Even if your tax debt can be discharged, if the government has filed a lien on your property, it will not be eliminated. Although you are no longer responsible for the debt, you will be required to pay the debt if you choose to sell your property.
Student loan debt is often not discharged in bankruptcy unless you can prove that paying the loan would cause undue hardship.
If you are considering filing bankruptcy, you need to seek the advice of a qualified bankruptcy attorney. Contact our office today online or by telephone to set up your initial consultation in order to learn what steps you should take to begin the process of starting a fresh financial future.