Your delinquency status has little to do with whether or not you can file bankruptcy. Federal law allows anyone to file bankruptcy at any time, as long as you meet some basic qualification standards. However, timing your bankruptcy based on your payments to creditors can make sense. If you are in the position where you do not even need to fall behind on your payments, you may not even qualify for bankruptcy in the first place.
Payments Are Wasted Money
You generally don't want to fall behind in your payments to creditors unless you are absolutely certain that you either cannot make the minimum payments or that you fully intend to file bankruptcy. However, if you know for a fact that you are going to file bankruptcy, you can consider any further payments you make to creditors to be wasted money. You are not going to recover any payments you make, and you will not receive any benefit or credit from making those payments since you are going to discharge those debts in bankruptcy. You can divert the money you were going to pay your creditors towards your legal fees or other necessary expenses.
Payments Are Preferential
If you avoid delinquency and continue to make payments right up until the time you file bankruptcy, the court will view your recent payments as preferential. A preferential payment is any payment you have made to any creditor within the 90 days before you file bankruptcy. These payments are preferential because the court wants to distribute any money you have equally to your creditors. If you paid one more than the others right before your bankruptcy, they were unjustly enriched in the eyes of the court. When you file your bankruptcy petition, you must painstakingly list every creditor payment you make in this time period. The court will retrieve those payments from your creditors and redistribute them equally. While this may not matter to you if your creditors are credit card companies, the law applies to payments to friends and relatives as well. The court will issue an order for those individuals to hand over the money you paid them, which can obviously cause problems for you.
No Need to Spare Credit
Once you file bankruptcy, your credit will be damaged regardless of how spotless your credit history may have been before you filed. If you know you are headed down this path, preserving your credit by making payments to creditors makes no sense. There is no need to spare your credit when you know it will be ruined by your bankruptcy anyway.
May Affect Qualification
If you are not delinquent on your payments before bankruptcy, it most likely means you have the money to pay at least some of your debt. As a result, if you intend to file Chapter 7 bankruptcy, you may not qualify. In simple terms, if your income is too high, as measured by the median income for people in your state, you cannot usually file Chapter 7 bankruptcy. If your income has dropped only recently, you still may not qualify for a few months as Chapter 7 bankruptcy uses a six-month look-back period for qualification.
- United States Courts: Chapter 7 Bankruptcy
- NOLO: Chapter 7 Bankruptcy -- Who Can't File?
- Experian: Credit Advice -- Bankruptcy Has Greatest Effect on Scores, Collections A Close Second; Maxine Sweet; November 24, 2010
- Moran Law: Bankruptcy In Brief -- Before You File
- U.S. Courts. "Federal Court Finder." Accessed May 18, 2020.
- U.S. Courts. "Chapter 7 Means Test Calculation." Accessed May 18, 2020.
- U.S. Dept. of Justice. "LIST OF APPROVED PROVIDERS OF PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSES (DEBTOR EDUCATION) PURSUANT TO 11 U.S.C. § 111." Accessed May 18, 2020.
John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.