Saturday, October 20, 2012

Should you stop paying credit cards?

Should you stop paying credit card balances once you have decided to file for bankruptcy relief? Or should you ever stop paying them when you do not plan to file bankruptcy? I will address each of these situations.

Credit cards before filing bankruptcy: For many debtors who plan to file a Chapter 7 bankruptcy case, ending their credit card payments once they make the decision to file only makes sense. Whether your credit card debt is one dollar or one million dollars, it is going to be discharged. You can stop paying credit cards and start saving that money, perhaps to pay for the bankruptcy case or meeting other needs.

This is a decision to make carefully. For one thing, you need to be certain that you are going to file because if you change your mind after you start paying, your interest rates may have shot up to default rates, making your minimum payments higher and increasing the total amount of payments you will need to make to pay off your cards. You need to evaluate your situation carefully to be certain there is no reason you will avoid filing. Also, you cannot expect to save up more money than you are entitled to exempt and retain after your bankruptcy filing, so you should know your cash exemption limit if you will end up saving thousands of dollars before you file your case.

Not paying credit cards but not filing bankruptcy: There are some people who are "judgment proof" who have little reason to file bankruptcy because they have minimal assets and will not be acquiring any. For example, people who are renting their home and are supported by Social Security, pensions, or other benefits which cannot be garnished by creditors through judgments — and also have minimal assets — have nothing they will lose if creditors sue them, so there is no benefit from filing bankruptcy to maintain their budget or keep assets. If you are in this situation and you have credit card debt, you may as well save your money for meeting your necessary expenses.

Again, your decision to stop paying credit cards should be based on a careful analysis of your financial situation. You need to learn whether your assets are of the type and significance to be lost through judgments or bankruptcy, and you need to understand how your financial situation will progress over time with or without a bankruptcy.

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