Status Of Payments Does Not Affect Bankruptcy Eligibility
I get asked this question often. People think the gateway to bankruptcy relief requires being delinquent on payments.
There is no such requirement.
You can file bankruptcy if your credit score is 900 and never missed a payment in your life.
The truth is: If you wait until you are missing payments, you are probably waiting too long to file bankruptcy.
Why do I say that?
Because if you are eligible for bankruptcy and it is your best option, every payment you make is just wasted money.
At a time you cannot afford to waste any.
But most people regard bankruptcy as the absolute last resort. So they will unnecessarily pay hundreds–and sometimes thousands–of dollars per month on their credit cards and other debts, for many months.
See my article on why treating bankruptcy as a last resort is a problem.
Many do this when their income is less than their living expenses, which means they are either:
- Borrowing money to make the payments, or
- Depleting their cash reserves.
Neither one of these is a good thing.
Borrowing Money To Pay Debts Won’t Help
Borrowing money to pay your credit cards usually doesn’t accomplish anything except create a new debt for your old debt–
perhaps at a lower interest rate, but usually not a big difference and almost never enough to pay off the old debt.
Using Your Savings Is A Bad Idea
Others deplete their cash reserves. The balances dwindle until there is nothing.
What many don’t realize is that you likely could have protected and kept these savings in a bankruptcy case!
You are allowed to exempt (protect) a certain amount of assets in bankruptcy.
Usually, by the time people finally decide to file bankruptcy, they have nothing left and often cannot even afford a competent bankruptcy attorney.
This is not good financial planning.
Your Attorney May Recommend Continuing Some Payments
Creditors in bankruptcy can object to the discharge of their debt if they can prove you did not intend, or have a reasonable expectation of being able, to pay it when you incurred the debt.
Large and frequent use of credit cards shortly before filing bankruptcy is evidence of the lack of intent to repay.
In that situation, it might make sense to make payments on your cards for a while longer (and for sure stop using the cards). But this has to be part of a larger strategy and should only be done under the supervision of a bankruptcy attorney.
Do Not File Bankruptcy If You Do Not Need To File Bankruptcy
All the above assumes that you actually need to file bankruptcy. That is the main issue: Whether it is in your best interest to file a bankruptcy.
Whether you are current with payments or not will not affect your ability to file.
A consultation with an experienced bankruptcy attorney can help you determine whether you need to file a bankruptcy case.
See more information on when it might be time to look into bankruptcy
Image courtesy of Kate Hiscock