In general, paying off a creditor shortly before you file for bankruptcy is not a good idea. If you are filing for bankruptcy, you may be considering repaying certain debts before you file. Although paying off debts before filing bankruptcy may seem like the right thing to do, it is often not a good idea. In many cases, if you repay a debt within three months before filing longer if the debt was to a family member or close friend, the bankruptcy trustee can sue the creditor to get the money back. Why Do Consumers Want to Repay Debts Before Filing Bankruptcy?If you file for bankruptcy, at the end of your case you will receive a discharge. A discharge is a court order wiping out most or all of your debts some types of debts cannot be eliminated in bankruptcy. Sometimes a consumer doesn’t want a particular debt to be wiped out, and is tempted to pay it before filing bankruptcy. Some common situations where a consumer might want to pay off a debt before filing include: Why Paying Debts off Before Filing Is a Really Bad IdeaPaying off a debt before filing your bankruptcy can cause problems for you and the person or business that you paid. Paying Off a Debt Might Be a Preferential TransferWhen you file for bankruptcy, a bankruptcy trustee will be appointed. The trustee’s job is to fairly distribute your assets and property, if any, among your creditors. (You don’t have to give up all of your property during bankruptcy, learn what you can and cannot keep in bankruptcy.) The goal is to ensure that no one creditor has an unfair advantage over another. If you pay a creditor within a short period of time before your bankruptcy, the court may consider that payment to be a “preferential transfer.” Because you pay that one creditor 100% of the debt owed, and then have fewer assets left to repay other creditors through your bankruptcy, you have “preferred” that creditor over the others. If that happens, the trustee can try to get the money back through a claw back action. How Far Back in Time Does the Court Look?If you have made a preferential transfer to a creditor within the 90 days before you filed for bankruptcy, the trustee can file a claw back suit and try to obtain the funds from the paid creditor. If you repaid a close friend or family member, sometimes referred to as an “insider,” the time period that a court will consider extends to a year before you filed. What Happens in a Claw back Suit?In a claw back suit, the trustee brings a lawsuit against the creditor that you paid off in order to get the money back. A claw back suit can cause several problems with your bankruptcy. What Debts Can You Pay Before Filing?Not all pre-bankruptcy payments will be considered to be preferential transfers. You can make payments on debts if normally make such payments. The key is to not pay any more than you have been paying towards that debt. For example, if you regularly pay your physician $100 a month to repay a larger medical debt, you may continue to do so. You can continue to pay your regular car payment, mortgage, child support, or student loans. You can also pay credit card debt that you recently incurred to purchase regular necessities of life, such as gas or food. Can I Pay Debts After My Bankruptcy Discharge?If you want to ensure that a creditor gets paid, the best way to do this is after the bankruptcy. There is nothing that prevents you from paying off a creditor, even if its debt has been discharged in the bankruptcy. This is best done when you want to repay friends, family members, employers, or medical providers. However, many financial institutions and credit cards may refuse your payment after a bankruptcy discharge has been entered. No one wants to file bankruptcy. But when the bills become overwhelming, it becomes the best option for some. Bankruptcy can be a solution for those who are drowning in payments and can’t keep up. There are 2 kinds of bankruptcy for the average consumer: Chapter 7 and Chapter 13. In Chapter 7, most of your debts are completely wiped out, though this is reflected on your credit report for several years. In Chapter 13, you arrange a plan with your creditors to pay pennies on the dollar for your debt over the course of 3 to 5 years, and then whatever is left is dismissed. Your Credit Report Will Be Impacted For Several YearsWhen you file for a Chapter 7 bankruptcy, it remains on your credit report for 10 years. With a Chapter 13, you pay it off sooner, so it only stays on your report for 7 years. This can make obtaining new credit really difficult. A few ways around this are reaffirming your car loan continuing to make payments on time can help rebuild your score. You can also get a secured card with your bank to help build credit a local credit union is usually your best bet for this. Don’t even think about opening any offers for credit cards you get in the mail when you file, though your mailbox will be full of them, and the idea of bankruptcy is to pay your balances down, not to let them keep adding up. You’ll need to stop using creditWhen you file for bankruptcy, a person called a trustee manages your case on behalf of your creditors. Some trustees can be more invested in the case than others, especially if they can collect assets from you for whom they earn commission. They’ll also decide if certain debts may not be discharged, especially debts you incurred within the previous 3 to 6 months you filed. If you’ve been racking up charges on a credit card or just took out a new loan, it’s likely you’ll still be on the hook for that if you file now. If you’re planning on filing, you need to stop using any kind of credit entirely for about 6 months before you file to ensure that as much debt as possible can be discharged. Bankruptcy doesn’t mean you’re a bad personAll that said, if you’re thinking about filing for bankruptcy, don’t let the credit implications scare you. No one needs to know about your situation except you, your attorney (and yes, you should have one, as the paperwork can be overwhelming and confusing) and the court. Chapter 7 BankruptcyIndividuals and in some cases businesses, with few or no assets typically file Chapter 7 bankruptcy. It allows them to dispose of their unsecured debts, such as credit card balances and medical bills. Those with non-exempt assets, such as family heirlooms (collections with high valuations, such as coin or stamp collections); second homes; and cash, stocks, or bonds must liquidate the property to repay some or all of their unsecured debts. A person filing Chapter 7 bankruptcy is basically selling off their assets to clear their debt. People who have no valuable assets and only exempt property such as household goods, clothing, tools for their trades, and a personal vehicle worth up to a certain value may end up repaying no part of their unsecured debt. Chapter 11 BankruptcyBusinesses often file Chapter 11 bankruptcy, the goal of which is to reorganize, remain in business, and once again become profitable. Filing Chapter 11 bankruptcies allows a company to create plans for profitability, cut costs, and find new ways to increase revenue. Their preferred stockholders, if any, may still receive payments, though common stockholders will not. Chapter 13 BankruptcyIndividuals who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13, also known as a wage earners plan. It allows individuals as well as businesses, with consistent income to create workable debt repayment plans. The repayment plans are commonly in instalments over the course of a three- to five-year period. In exchange for repaying their creditors, the courts allow these debtors to keep all of their property, including otherwise non-exempt property. What to Do Before Filing Bankruptcy?Before filing for bankruptcy, here are a few things you should do: Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
Ascent Law LLC
8833 S. Redwood Road, Suite C West Jordan, Utah 84088 United States Telephone: (801) 676-5506
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