Should I stop paying my credit cards?

If you have decided to file

Once you have decided to file, and especially once you have hired an attorney, most attorneys will tell you to stop paying unsecured debts that will be discharged. Every dollar you send a credit card company at that point is a dollar that disappears, and it is a dollar you may need for the filing fee, the attorney fee, or simply for living. There is no legal obligation to keep paying, and stopping does not affect your ability to file.

Keep paying secured debts you intend to keep, like a mortgage or car loan, and anything that will not be discharged, like child support.

If you have not decided

Stopping payments without a decision is where people get into trouble. After a few missed payments the account goes to collections. Within several months to a year, some creditors sue. A judgment leads to garnishment or a bank levy. None of this is a catastrophe if you end up filing, because bankruptcy handles all of it. But if you end up not filing, you have traded a manageable problem for a worse one.

The better sequence is: understand your options, decide, then act on the payments.

What to avoid in the months before filing

These come up constantly and can turn a simple case into a difficult one.

• Do not run up the cards. Charges for luxury goods or services above a certain dollar amount in the 90 days before filing, and cash advances above a certain amount in the 70 days before filing, are presumed non-dischargeable. Any significant charge made when you already knew you could not pay it can be challenged as fraud.
• Do not pay back family or friends. Repaying a loan to a relative or business partner in the year before filing is called a preference to an insider. The trustee can sue that person to recover the money. If you want to protect a family member, the answer is to pay them after the case, not before.
• Do not pay one creditor a large amount. Payments over about $600 to any single creditor in the 90 days before filing can be recovered by the trustee. This rarely matters for ordinary monthly payments, but it does for lump sums.
• Do not cash out retirement accounts. Retirement accounts are almost always fully protected in bankruptcy. Using them to pay debt that would have been discharged is one of the most painful and common mistakes.
• Do not transfer property to anyone. Putting a car in someone else’s name or “selling” something to a relative for less than it is worth will be unwound, and it can cost you your discharge. The what-gets-cases-in-trouble answer covers every one of these patterns, and the bitter irony that the asset was usually protected anyway.
• Do not take out new loans to pay old ones unless you understand exactly how that debt will be treated.

If you are not going to file

Then stopping payments is a negotiation strategy, not a legal one, and it comes with costs: credit damage, collection contact, possible lawsuits, and possible tax consequences if a creditor eventually settles for less. It is sometimes reasonable, particularly for people whose income and property are protected from collection. But it should be a decision, not a default.

Things that change the answer

• Whether you are current now, and how long you can stay current.
• Whether a lawsuit or garnishment is already underway.
• Whether you have made large payments or charges recently.
• Whether you are leaning toward Chapter 7, Chapter 13, or no bankruptcy at all.