People typically file for bankruptcy when their debt becomes too overwhelming for them to continue to handle. This is nothing to be ashamed of and thousands of people file for bankruptcy each year in Minnesota alone.
The bankruptcy law is designed to allow people to hit the “reset button” and be relieved from their legal obligation to pay past-due debt. Rarely do people regret filing for bankruptcy and many wish they had not waited so long to file when they finally do.
Making Payments While You Consider Bankruptcy
A common concern that many people have when considering filing for bankruptcy is whether or not they should continue making payments towards their past-due debts. The simple answer is that there is nothing wrong with making payments towards your past debts even though you are strongly thinking about filing for bankruptcy.
You should definitely continue making payments for things that you want to continue to use and keep, such as cars and homes, which are subject to security interests (i.e. a lien). Not paying these debts can result in things like repossession of your car, or foreclosure upon your home.
Filing for bankruptcy only temporarily prevents these “secured creditors” from re-taking the property. This is because bankruptcy only gets rid of debt and not security interests in property. Therefore, secured creditors can re-take property for which you stop paying.
Unsecured Debts
As to debts for which the creditors have no security interest (aka unsecured debts), it is typically not advisable for you to continue making payments on these debts once you have decided that you will be filing for bankruptcy in the near future.
These kind of debts typically consist of things like credit card debt, medical debt and unpaid personal loans. Making payments on these debts depletes the amount of money you have to pay for other important expenses, such as groceries and utilities.
You are essentially just throwing money by paying these debts, once you have decided you are going to file for bankruptcy, as there is little creditors can do to harm you without a security interest in your property.
These types of creditors can send you bills, and call you, but cannot take any action against you or your property without first filing a lawsuit and getting the court to enter a judgment against you. This process takes a long time, so there is little danger in not making payment towards these kinds of debts for a few months while you prepare to file for bankruptcy.
Having a Judgement Removed
Even if you have already been sued and the Court has entered a judgment against you, once you get your bankruptcy discharge, you can apply to have that judgment removed. This is almost always granted by the Court.
Notably also, the filing for bankruptcy immediately stops creditor’s ability to collect against you from the date you file your bankruptcy petition. This is called the “automatic stay” and legally prevents creditors from calling you, sending you collection letters, suing you, and even stops pending lawsuits in their tracks.
Preferential Payments
When making payments towards past debts, one should also consider the possibility that such payments will be considered “preferential payments.” Preferential payments are payments towards debts owed to certain creditors, which are not being made to other creditors.
Since the law requires that all creditors be treated fairly, paying certain creditors, and not paying others, sometimes give the bankruptcy trustee the right to “avoid” such payments. The trustee can avoid preferential payments by bringing legal action (i.e. filing a lawsuit) against the “over-paid” creditors to re-take the money that was paid to them, and then, distribute it to the other creditors.
Ordinary Creditors
In order for the trustee to avoid a preferential payment to an “ordinary creditor,” the overall dollar amount paid to the creditor must be $600, or more, and the payment must have been made within 90 days of the bankruptcy case being filed. Ordinary creditors are regular businesses such as credit card companies and hospitals.
Typically, people filing for bankruptcy could not care less about the trustee avoiding these kinds of payments due to their lack of a personal relationship with the creditor and the fact that any such avoidance by the trustee has no impact on their bankruptcy case (i.e. no impact on their ability to get a discharge). However, a special problem arises when the creditor is an “insider.”
What An "Insider" Is
Insiders are people with a close relationship with the person filing bankruptcy such as their close friends and family members. The bankruptcy trustee actually has the right to avoid payments of $600, or more, made to insiders within an entire year prior to filing their case. This is why it is definitely not a good idea to make large payments back to family members shortly before filing for bankruptcy.
Certain bankruptcy trustees are often a bit too eager to exploit this situation to coerce bankruptcy filers into making big payments to the trustee to avoid negative action being taken against their family members. There are some legal defenses to preferential payments which I will elaborate upon in future blogs.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT KAIN & SCOTT
It’s always advisable to consult with an experienced bankruptcy attorney prior to filing to get an assessment of your case and whether it will present any issues that will cause you and/or your family any such potential problems. See us anytime at www.kainscott.com!
