What Debts to Pay (and NOT to Pay) When Filing for Bankruptcy

Filing for bankruptcy is a significant financial decision that requires careful planning and strategy. Once you decide to file, knowing which debts to pay—and which ones to stop paying—can protect your assets and maximize the benefits of the bankruptcy process. Making the wrong payment decisions could undermine the protections that bankruptcy offers or even create legal complications. In this article, we’ll explore the types of debts you should continue paying, those you should stop paying, and how these decisions can impact your bankruptcy case.

1. Stop Paying Unsecured Debts

One of the key benefits of filing for bankruptcy is the discharge of unsecured debts. Unsecured debts are not tied to any collateral, which means the creditor cannot seize specific property if you default. Once you’ve made the decision to file, continuing to pay unsecured debts is usually unnecessary—and in many cases, unwise—because those debts will likely be wiped out through the bankruptcy process.

Common Unsecured Debts You Can Stop Paying:

✅ Credit cards – Credit card debt is typically discharged in both Chapter 7 and Chapter 13 bankruptcy. Stop making payments to avoid wasting funds that could be better used elsewhere.
✅ Medical bills – Medical debt is considered unsecured and can almost always be discharged in bankruptcy.
✅ Personal loans – If the loan is not backed by collateral, it will likely be treated as unsecured debt and discharged.
✅ Utility bills – While past-due utility bills can be discharged, keep in mind that utility companies may require a deposit to keep services active post-bankruptcy.

Why stop paying unsecured debts?

• Once you file for bankruptcy, the automatic stay takes effect, which prevents creditors from taking any collection actions, including phone calls, lawsuits, or wage garnishments.
• Payments made shortly before filing may be considered preferential payments and could be recovered by the bankruptcy trustee.

2. Continue Paying Secured Debts If You Want to Keep the Property

Secured debts are tied to collateral—property that the lender can repossess if you default. If you want to keep your car, home, or other secured assets, you need to stay current on these payments even after deciding to file for bankruptcy. Bankruptcy can eliminate your personal liability on secured debts, but it doesn’t erase the lender’s right to repossess or foreclose on the property if you default.

Common Secured Debts to Keep Paying If You Want to Keep the Asset:

✅ Mortgage payments – If you want to keep your home, you must continue making mortgage payments. In Chapter 7, you can reaffirm the debt to keep the house. In Chapter 13, you can catch up on missed payments through a repayment plan.
✅ Car loans – If you want to keep your vehicle, you must continue making car loan payments. In Chapter 13, you may be able to restructure the loan with lower payments.
✅ Secured personal loans – Loans secured by collateral (e.g., equipment or jewelry) need to be paid if you wish to retain the underlying asset.

What happens if you stop paying secured debts?

• If you stop paying, the lender can initiate foreclosure (on a home) or repossession (on a vehicle or other collateral) even during bankruptcy.
• In Chapter 13, you can propose a repayment plan that includes catching up on missed payments to keep the property.
• In Chapter 7, you must stay current and may need to sign a reaffirmation agreement to retain the asset.

3. Prioritize Essential Expenses

Bankruptcy doesn’t relieve you of the responsibility to meet basic living expenses. Even after deciding to file, you must continue covering essential costs to maintain stability and avoid further financial hardship.

Essential Expenses to Keep Paying:

✅ Rent – If you rent your home and want to stay there, you must continue paying rent.
✅ Utilities – Keep paying utilities to avoid service interruption.
✅ Insurance – Maintain health, auto, and homeowner’s insurance to avoid coverage lapses and potential legal issues.
✅ Child support and alimony – These obligations are non-dischargeable in bankruptcy, meaning you must continue making payments.

4. Handle Secured Debts Strategically in Bankruptcy

Bankruptcy can help you restructure or eliminate secured debt, but your approach will depend on whether you file Chapter 7 or Chapter 13:

• Chapter 7:
  • If you want to keep your home or car, you must remain current on secured debt payments.
  • If you cannot afford the payments, you may choose to surrender the property and have the debt discharged.
• Chapter 13:
  • Allows you to catch up on past-due secured debts over a 3- to 5-year repayment period.
  • In some cases, you can reduce the loan balance on a car loan to the actual value of the vehicle (a “cramdown”).

5. Don’t Pay Friends or Family Members

Many people feel pressured to repay personal loans from friends or family before filing for bankruptcy—but this can backfire. Payments to friends or family members within one year before filing can be classified as preferential transfers. The bankruptcy trustee has the authority to recover these payments and distribute them among other creditors.

Why You Should Avoid Paying Family or Friends:

• The bankruptcy court treats payments to family members as “insider payments.”
• The trustee may sue the family member to recover the money.
• It’s better to wait until after bankruptcy to resolve personal debts outside the legal process.

6. Avoid “Last-Minute” Payments or Transfers

Making large payments or transferring assets right before filing can trigger suspicion from the bankruptcy trustee. Payments made within 90 days before filing to creditors or within one year to insiders (like family) can be considered preferential transfers and undone by the court.

Red Flags for the Trustee:

🚫 Large credit card payments made shortly before filing.
🚫 Transferring property or assets to a family member to “protect” them from creditors.
🚫 Paying off loans to a single creditor while ignoring others.

Key Takeaways

✅ Stop paying unsecured debts (credit cards, medical bills) once you’ve decided to file.
✅ Continue paying secured debts (mortgage, car loans) if you want to keep the property.
✅ Keep paying essential living expenses (rent, utilities, insurance).
✅ Avoid paying friends or family to prevent clawbacks by the trustee.
✅ Consult with an experienced bankruptcy attorney to ensure you are making the right payment decisions and protecting your assets.

Conclusion

Knowing which debts to pay—and which to stop paying—before filing for bankruptcy can significantly affect the outcome of your case. Strategic payment decisions can help protect your assets, prevent legal complications, and ensure a smoother bankruptcy process. If you’re considering bankruptcy, consult with a qualified bankruptcy attorney to create a sound strategy tailored to your financial situation.