Should I Keep Paying My Credit Cards if I’m Going To File Bankruptcy?
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If you're planning to file for bankruptcy, you usually don't need to keep paying your credit cards. In Chapter 7, credit card debt is typically wiped out, so making payments may not make sense. In Chapter 13, your debt will be included in a repayment plan, so you can stop paying and focus on that instead. Chapter 7 and Chapter 13 have different goals and benefits, so knowing which type of bankruptcy you're filing will help you decide what to do.
Written by Attorney Paige Hooper.
Updated October 28, 2024
Should You Keep Paying on Your Credit Cards if You’re Going To File Bankruptcy?
Many people stop paying their credit cards once they know they’re going to file for bankruptcy. That’s because credit card balances will be discharged as part of a successful Chapter 7 bankruptcy case. If you’re filing Chapter 13 bankruptcy, your credit card payments will be included in the required monthly payment plan.
Chapter 7 bankruptcy is designed to give people a fresh start by erasing certain unsecured debts, including credit card debt. So, continuing to make payments on those cards is basically a waste of your money that could be used for more important things.
Many people who file bankruptcy are struggling to make ends meet. You might feel like you must choose between paying your credit card bills and paying your utility bills and other living expenses. Stopping your credit card payments can free up some much-needed money.
What Happens if You Stop Paying Your Credit Cards?
If you stop paying your credit cards before filing for bankruptcy, you may start getting collection calls and possibly see late fees added to your account. Your credit score may also drop as late payments are reported to the credit bureaus. But if you're filing for bankruptcy soon, this won’t matter much in the long run.
While the short-term consequences of stopping payments can feel stressful, bankruptcy will ultimately address the debt and give you relief from debt collection efforts. And as soon as you file your bankruptcy petition, you’ll get protection from debt collectors thanks to the automatic stay. Once your case is discharged by the bankruptcy court, you can start rebuilding your credit.
Why It Can Be a Bad Idea To Pay Off a Credit Card Before Filing Bankruptcy
Under bankruptcy laws, you aren’t allowed to make preferential payments to any single creditor, and paying off a credit card could count as a preferential payment, depending on how much you pay.
If you pay any creditor a total of $600 or more within the 90 days before you file bankruptcy, you must list the payment in your bankruptcy forms. In some cases, the bankruptcy trustee can make the creditor hand over the payment. The money doesn’t go back to you, though. The trustee instead divides it among all your unsecured creditors, so none of them gets preferred treatment over the others.
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Can I Keep My Credit Card if the Payments Are Current?
Probably not. When you file bankruptcy, creditors usually close all your credit card accounts — even if the payments are current or the balance is paid off.
Why? Creditors that violate the automatic stay face stiff penalties. Once they know you’ve filed bankruptcy, most creditors will close your account, regardless of your balance or payment status. That way, they don’t risk federal sanctions if they accidentally send you an automated statement or accept a payment.
You can’t hide your bankruptcy filing from your credit card company, even if you don’t list them in your bankruptcy forms. Bankruptcy filings are public records, and credit card companies typically monitor this kind of activity. Once they get notice of the bankruptcy, your cardholder agreement likely allows them to close the account.
Remember, after your bankruptcy discharge, you’ll be able to get a new credit card. Most filers rebuild their credit history faster than you might think.
What Is the Automatic Stay in Chapter 7 Bankruptcy?
The automatic stay stops creditors, lenders, and debt collectors from taking any action against you, including actions like:
Bills and collection letters
Lawsuits and judgments
When you file a bankruptcy case, the automatic stay protections take effect immediately and last until your bankruptcy case is discharged or dismissed. When you receive your bankruptcy discharge, your credit card debt and other unsecured debts like medical bills are eliminated. This means you aren’t responsible for paying it anymore.
Your credit card debt will be discharged whether the balance is $5 or $5,000. There’s no benefit to making a payment and trying to reduce your balance right before filing bankruptcy. Instead, it’s usually better to use that money to pay your living expenses or your bankruptcy filing fee.
Alternatives to Bankruptcy for Managing Credit Card Debt
Bankruptcy is one of several debt-relief options.
If you have less than $10,000 of credit card debt, you may want to start by making a budget and consider the debt snowball or debt avalanche method. Debt consolidation may also be a good option, especially if you have high-interest credit cards. When you consolidate your debt, you streamline your monthly payments and can pay less over time if you get a lower interest rate on the consolidation loan or credit card.
If you have more than $10,000 of debt or simply need more help, you can look into debt settlement or a debt management plan. To successfully settle a debt, you usually need to have a lump-sum payment available that’s around 50% of the total debt you owe. This also only tends to work if you’re already behind on your payments. Debt settlement is usually seen as a negative mark on your credit report.
Finally, a debt management plan (DMP) is a 3–5-year plan that streamlines your repayment and gets you a lower interest rate. You also get to work with a credit counselor who can help you sort out your financial situation. It’s important to note that your credit card accounts will likely be closed as part of the DMP, so if your main goal is to keep your accounts open, this may not be the best option for you.
Let’s Summarize…
When you file bankruptcy, your credit card debt is usually wiped out completely. Many people who are planning to file bankruptcy soon quit paying on their credit cards because they know their debt will be wiped out. As soon as you file bankruptcy, you get protection from the automatic stay against debt collection activities. Not paying on your credit cards can cause your credit score to dip, but many people find it’s easier to start rebuilding their score after they get their bankruptcy discharge.
If you’re not sure which debt relief option is best, take our quick screener to see which options you’re eligible for. If you want some personalized legal advice about the different types of bankruptcy or which is best for you, you can also set up a free consultation with a bankruptcy lawyer. They’ll also be able to let you know whether it makes sense for you to keep making your minimum credit card payments.
