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're facing a hardship and are struggling to make ends meet each month, it's absolutely ok to fall behind on payments before filing bankruptcy.
Written by Attorney Paige Hooper.
Updated February 7, 2022
High interest rates and fees can make it hard to afford your monthly credit card payments. You might feel like you must choose between paying your credit card bills and paying your utility bills and other living expenses. Bankruptcy may be a way out of a bad financial situation. Chapter 7 bankruptcy can eliminate credit card balances and other debt, and give you a fresh start, usually within a few months.
Many people worry that falling behind on their credit card monthly payments before filing bankruptcy will look bad on their credit report and destroy their credit score. But that’s typically not the case. This article covers how bankruptcy affects credit cards, why it’s OK to miss payments right before you file your case, and why it’s usually not a good idea to pay off your credit card before filing bankruptcy.
What Happens to Credit Cards in a Bankruptcy?
When you file a bankruptcy case, the Bankruptcy Code’s automatic stay protections take effect immediately. 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
The automatic stay lasts 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.
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Can I Keep My Credit Card if the Payments Are Current?
When you file bankruptcy, you must list all your assets and debts in your bankruptcy forms. Technically, a credit card that has a zero balance is no longer a debt, so you don’t have to list it on your forms. But that doesn’t mean you can keep the card. When you file bankruptcy, your creditor will probably still close your credit card account — 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.
Why Isn’t It a Good Idea To Pay Off a Credit Card Before Filing Bankruptcy?
If you plan to file bankruptcy, there’s no benefit to making a payment to reduce or pay off your credit card balance beforehand. In some cases, doing so could even violate the Bankruptcy Code’s rule against preferential payments. Bankruptcy law says that, when you file bankruptcy, all your unsecured creditors must get equal treatment. You aren’t allowed to “prefer” one creditor, or credit card, over another.
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, your 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 creditors, so none of them gets preferred treatment over the others.
When you file bankruptcy, the automatic stay prevents credit card companies from taking actions such as sending you bills or accepting your payments. To avoid violating the automatic stay, most credit card companies will close your account when you file bankruptcy, even if your account is current or paid off.
Under the Bankruptcy Code, you must treat all your unsecured creditors the same. You can’t give one credit card company better treatment by making a big payment before you file. If you do, your bankruptcy trustee could reverse the payment and divide the money among your creditors.
If you’re struggling to pay your credit card debt, remember that you have debt relief options, such as credit counseling and bankruptcy. If you aren’t sure if bankruptcy is the right option for you or which type of bankruptcy to file, you can have 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. If you can’t afford to hire a bankruptcy attorney, you may qualify to file Chapter 7 bankruptcy for free using Upsolve’s free filing tool.