Filing for Chapter 7 bankruptcy can be a difficult decision for many individuals, but it can also provide a much-needed fresh start for those struggling with overwhelming debt. However, some individuals may consider paying off some unsecured debts prior to filing for bankruptcy in the hopes of improving their financial situation. In this article, we will explore why it may not be a good idea to pay off unsecured debts prior to filing for Chapter 7 bankruptcy.
First, it is important to understand that paying off unsecured debts prior to filing for bankruptcy may not necessarily improve an individual’s financial situation. Even if an individual is able to pay off a significant portion of their unsecured debts, they may still be struggling with other debts, such as medical bills, or credit card debt, that they are unable to pay. Additionally, the high interest rates on credit card debt can make it difficult to make a significant dent in the outstanding balance. If you plan to file bankruptcy, there’s really no benefit to making payments to reduce or pay off your credit card balance beforehand.
Furthermore, paying off unsecured debts prior to filing for bankruptcy may not be financially feasible for many individuals. Many people who file for bankruptcy are living paycheck to paycheck and do not have any extra money to put towards paying off their debts. Additionally, many individuals may have already exhausted all other options, such as consolidating their debts or entering into a debt management plan, and are unable to pay off their debts through these means.
Another reason why paying off unsecured debts prior to filing for Chapter 7 bankruptcy may not be a good idea is that it can negatively impact the bankruptcy process. In some cases, doing so could even violate the Bankruptcy Code’s rule against preferential payments. Bankruptcy law states that, when you file bankruptcy, all of your unsecured creditors must be treated equally. You aren’t allowed to “prefer” one creditor over another. If you pay any creditor a total of $600 or more within the 90 days before you file bankruptcy, you must list it on your bankruptcy forms. In some cases, your trustee can force the creditor to return the payment. The money doesn’t go back to you, though. The trustee will divide it among all your creditors, so none will get preferred treatment over others.
While paying off unsecured debts prior to filing for Chapter 7 bankruptcy may seem like a good idea, it can actually have negative consequences for the individual’s financial situation and the bankruptcy process. Instead of paying off unsecured debts prior to filing, it may be more beneficial for the individual to consult with a bankruptcy attorney to understand their options and the best course of action for their specific circumstances. It’s advisable to consult with a bankruptcy attorney in Prattville to understand the best course of action for your specific circumstances.