Should I Stop Paying Creditors If I'm Going to File for Bankruptcy?

If you are about to file for bankruptcy relief, continuing to pay certain creditors is likely a waste of money. Plus many filers stop paying their debts and use the funds to pay a bankruptcy attorney—a practice that is fine with the courts. Whether you should stop paying your creditors will depend on:

• the types of debt, and
• how soon you expect to file your case.

If you aren't sure which bankruptcy chapter is best for you, start by learning about the differences between Chapter 7 and Chapter 13.

Types of Bankruptcy Debt

Bankruptcy doesn't cancel all debt. You'll also have to pay some obligations, called "secured debt," if you want to keep the property that serves as collateral, such as a home or car. Find out more about particular types of debt in bankruptcy.

Mortgage loans. Your mortgage is a secured debt. When you took out the loan, you agreed to give your lender a lien against the property, and the lien gives the lender the right to foreclose on your house if you default on your payments. When you file for bankruptcy, the discharge order—which wipes out your obligation to pay qualifying debt—eliminates your personal liability to pay the mortgage loan. It doesn't remove the lien. Therefore, if you want to keep your home, you must continue making your regular mortgage payments during and after the bankruptcy. This is true for both Chapter 7 and Chapter 13.

An exception to this rule exists if you are getting rid of a second or another junior lien through lien stripping in Chapter 13 bankruptcy. You can strip off a junior lien in Chapter 13 (not Chapter 7) if the value of your home is less than what you owe on the first mortgage.

Car loans. Similar to your mortgage, a car loan is a secured debt. If you want to keep your car, you must continue making payments on the loan. Some auto lenders will require you to enter into a reaffirmation agreement on the same terms as the original contract. You can take this opportunity to renegotiate the loan terms. Renegotiating works best if the creditor would prefer that you keep the car and you're genuinely willing to let it go.

Credit cards. Credit card obligations are treated as general unsecured debts in bankruptcy. Your bankruptcy discharge will wipe out card debt. As a result, if you are about to file for bankruptcy, making credit card payments is typically a waste of your money. But be aware that if you don't plan to file your case for a long time, stopping your payments can prompt the credit card company to file a lawsuit against you to recover its debt—although you'll be able to stop the litigation with a bankruptcy filing.

Medical bills. Overwhelming medical debt is one of the most common reasons people file for bankruptcy relief. Luckily, medical bills are general unsecured debts like credit card obligations. Similar to credit cards, paying your medical bills prior to filing for bankruptcy will be a waste of time—and money.

Alimony and child support. Domestic support obligations such as alimony and child support are nondischargeable in bankruptcy. You can't wipe out your obligation to pay these debts through bankruptcy. If you file for bankruptcy, you need to continue making your ongoing alimony and child support payments. One benefit of Chapter 13 is that you can catch up on support arrearages in your repayment plan. In fact, you must pay them in full through the plan.

Utilities. You'll likely want to continue making your payments on services you need such as your gas, electricity, water, and other utilities. You can discharge a utility bill in bankruptcy, but you can be charged a hefty deposit to continue service afterward.

Bankruptcy Timing

Before you stop paying your bills, you'll want to be certain that you will actually file for bankruptcy. Why? Because late payments and fees add up quickly, and once you fall behind, it's difficult to bring the accounts current. So you'll want to be sure that you qualify for bankruptcy.

• Chapter 7. If you plan to file for Chapter 7, you'll need to pass the means test in order to qualify for a bankruptcy discharge.
• Chapter 13. In Chapter 13, it's less about qualifying and more about having sufficient income to make the required monthly plan payment to your creditors.

Both of these calculations can be difficult and you'll want to certain of your status. The easiest way to determine your qualification is by meeting with a local bankruptcy attorney. Many will review your case at a free consultation.

Learn more about planning for bankruptcy.