If I File Bankruptcy Should I Pay Off Some of My Debts?

Debts while Considering Bankruptcy

Most people who are faced with the decision on whether to file bankruptcy or not are conflicted about what debts to keep paying and what they can let go when there is not enough money to go around. For many, even after the choice to file bankruptcy is made, there is a desire to make as many payments as possible, out of a feeling of obligation or a desire to keep in the creditor’s good graces. The choice is personal, but it is important to understand how paying off a debt prior to bankruptcy can impact your case.

Impacts of Paying a Debt Prior to Bankruptcy

One of the ways in which your case is impacted by paying off a debt shortly before you file bankruptcy is by what is referred to as a preference. In the bankruptcy world, this seemingly everyday word can take on an entirely different meaning than what you might think. In the eyes of the Bankruptcy Court, when you pay one debt and let others go, it appears as though you are giving special treatment to the lender whose debt has been paid. The result can include:

● An investigation into the payment by the Bankruptcy Trustee.Paying Debts While Considering Bankruptcy

● If the Trustee determines that the payment meets the legal definition of a preference, the payment can be recaptured and distributed in a way considered “fair” to all of your lenders. This could include dividing up the money paid and distributing it among all of your creditors rather than just one.

Additional Concerns With Paying Debts Prior to Bankruptcy

A second concern in this regard is how your banking institution will view recoupment of the funds, especially if the payment was to the bank for an overdraft or other fee. Many banks will close your account and rely upon a customer agreement that gives them this right. It is critical to avoid making payments that appear to favor one lender over the other, so you can avoid being questioned about your motives. For more information on this very important bankruptcy issue, call us now at (916) 485-5444 to schedule your free attorney consultation, and learn how to unravel the maze of paying debts prior to bankruptcy.

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