This is a touchy subject for a bankruptcy attorney to write about, but a recently-received email contained the following sentence that got my attention. "Completely pay up one or more of your credit cards before filing for bankruptcy."
I followed the link and it went to an article published by a bankruptcy law firm that had an impressive website. I followed a link in the article and found the same article on the blog of the bankruptcy law firm. That article includes this paragraph:
"Completely pay up one or more of your credit cards before filing for bankruptcy. You may need to raise some cash to pay off your card by liquidating some assets that have fewer consequences. Do it, because by bringing your card balance down to zero, this card will not be listed as one of your creditors and hence, even after filing for bankruptcy, you can keep the card to build up credit at a lower interest rate than you could possibly get after bankruptcy."
Is that good advice for people contemplating bankruptcy? No. Why not? Let me count the ways:
1. The person would probably lose that paid-off and not-included-in-bankruptcy-filing credit card account anyway. Credit card companies routinely monitor bankruptcy filings and close existing accounts of filers even if there is a zero balance and the debt isn't listed in the filing schedules. That's not 100% certain to happen, but highly likely.
2. The payment to the credit card company would need to be listed in in the bankruptcy filing (Statement of Financial Affairs, item #3) if it was more than $600 within 90 days before filing. That payment would be recoverable by the trustee (as a preferential payment) to be distributed to all creditors, negating any supposed benefit from paying off that card.
3. The person would lose that in-short-supply cash, which might have been able to be "exempted" (protected from creditors and therefore kept following bankruptcy), for no good reason.
The point is that this advice from a bankruptcy law firm, with a very impressive website, is not only not valuable but would likely cause financial harm to anyone who followed it prior to filing bankruptcy. Last but not least, that same article from the bankruptcy law firm said "You should be wary of bankruptcy specialists who charge high fees." Would you trust your bankruptcy preparation and filing to this low-fee law firm?
What's the moral of this story? Be very careful out there when choosing a bankruptcy attorney.
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Very good article, Malcolm. Potential clients really should run not walk when any bankruptcy attorney encourage them not to list a debt, which is required by law to be listed on their schedules.
Thanks, Andrea. In fairness, that "bad" article didn't recommend not listing a debt. If a credit card account has a zero balance, there is no debt (or claim) and therefore that account doesn't need to be listed in a bankruptcy filing. The problem with the article is the advice to take that account down to zero prior to filing bankruptcy.
I saw the same article and post a comment there. I don't know if the author will change the article or if my comment will survive moderation, but implying the someone can "keep" a credit card with a zero balance is absolutely absurd.
Hello Carl,
Yep. Makes you wonder a lot. I know you and I deal with other very competent bankruptcy attorneys; that may lull us into not realizing there are the "other kind" out there. It makes you wonder if someone gets those basics so very wrong like that, what else are they going to get wrong that you're not aware of.
Malcolm
The article seems almost surreptitious in its message–as though someone is conducting a misinformation campaign against debtors.
Apart from the foregoing bad ideas, here's one I thought of from a more practical side: why are we encouraging debtors to hang on to a credit card?!? It's almost like telling a drug addict whose drying out to "hang on to some weed for later". Astoundingly stupid advice.
I have to say that part of my standard advice to people going through Chapter 7 bankruptcy is to start to rebuild their credit afterward by getting one of the low-limit credit cards they'll be offered, using it regularly, and paying it in full before the balance reached 1/2 the limit. It will have a small-enough limit to be useful only for convenience and to pay in full often. I know some bankruptcy attorneys don't like to recommend that, but I've found that my clients do well with that plan.
I tell clients that paying off a credit card prior to filing will probably not allow them to keep using the card, for reasons stated. For most clients under age 70, rebuilding their credit is a goal. It's really impossible to live without it for most of us. I have a couple of books I recommend (Nolo Press' Credit Repair and Bounce Back From Bankruptcy) to assist people in rebuilding their credit. Like it or not, getting a secured credit or secured debit card that's reported on the credit report is one of those ways. Reaffirming on a debt is another (assuming the payments are affordable and the collateral's value exceeds the debt so debtor has a way out). I realize the latter is controversial in NACBA. Wisconsin is a non-recourse state in 99% of owner occupied foreclosures also.