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 depends on the debt type 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.

Which Types of Bankruptcy Debt Can I Stop Paying?

Bankruptcy doesn't cancel all debt, and you'll likely want to stay current on those, when possible. 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.

However, it's safe to stop paying the debts you know you can eliminate in your bankruptcy case. Below you'll learn what you can expect with many of the debts people deal with in bankruptcy.

Mortgage loans. You can erase a mortgage in bankruptcy, so if you plan to let the home go back to the bank, you can stop paying for it. However, a mortgage is a secured debt. Therefore, you must continue making regular mortgage payments during and after the bankruptcy to keep your home. Otherwise, the lender will use the lien rights to recover the house. This is true for both Chapter 7 and Chapter 13.

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, but it doesn't remove the lien.

An exception to this rule exists if you can get 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 (but not Chapter 7) if the value of your home is less than what you owe on the first mortgage. You'll want to speak with a bankruptcy lawyer for help because you'll likely need to set the lien strip for trial in the bankruptcy court.

Learn how to protect a home in bankruptcy.

Car loans. Similar to your mortgage, you can eliminate a car loan in bankruptcy. If you don't want to keep the car, you probably don't need to make the payment before bankruptcy. However, 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 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," the order that eliminates debts, 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. Like credit cards, paying your medical bills before 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 responsibility to pay these debts through bankruptcy. If you file for bankruptcy, you must continue making 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 paying for 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: When Can I Stop Paying Debts?

Before you stop paying your bills, you'll want to be sure you will file for bankruptcy. Why? Late payments and fees add up quickly. Once you fall behind, keeping the accounts current is challenging. So, you'll want to be sure that you qualify for bankruptcy.

• Chapter 7. If you plan to file for Chapter 7, you must pass the means test to qualify for a bankruptcy discharge.
• Chapter 13. Chapter 13 is less about qualifying and more about having sufficient income to make the required monthly plan payment to your creditors.

These calculations can be complicated, and you'll want to know your status. The easiest way to determine whether you're qualified is by meeting with a local bankruptcy attorney. Many will review your case at a free consultation.

Learn more about planning for bankruptcy.