Dear Bankruptcy Adviser, I am most likely going to file bankruptcy in a couple of months. I have two credit cards that I have been using and for the most part paying off every month. My questions are: If I pay off these two cards, will that be considered preferential payment and cause me problems in the bankruptcy? And the second question: If any cards have a zero balance when I file, will that credit card account be closed by the bankruptcy, or will I be able to maintain it in good standing albeit at a higher interest rate and likely much smaller limit? -- Jason
Dear Jason, You should stop using your credit cards prior to filing the case. You don't want to ever give the appearance that you are "running up" your credit cards. Each creditor will review your account activity after receiving the bankruptcy notification and may challenge your right to eliminate some or all of the balances you owe if it appears you have inappropriately made charges on the account prior to filing.
You ask two good questions. One I can answer and the other I can't, but I'll try to give you some guidance. First I'll explain preferential payments.
Making Preferential Payments
Any payments made to ordinary creditors in the 90 days prior to case filing and totaling in excess of $600 must be disclosed on your bankruptcy petition. This includes payments on car loans, mortgages and credit cards/personal loans, as these types of creditors are considered ordinary creditors.
The other type of creditor is known as an "insider." The insider definition includes, but is not limited to, family members. You must disclose any payments made to an insider in the 12 months prior to filing.
You are correct to be concerned that payments made to ordinary creditors and insiders can be problematic when filing bankruptcy. The law on this issue is nuanced and complex. Preferential payments can cause issues to you and to the person or company that you paid.
The legal reasoning is simple. All creditors should be treated equally -- be they your mother or your bank. No one should receive special treatment, and the laws attempt to maintain that equality.
Unfortunately, this also makes specifically answering your question too complicated. I would like to say that preferential payments are not a big deal, but they can be an issue in a case. And failing to disclose a significant payment may eliminate your right to request bankruptcy protection altogether.
Bankruptcy and Cards With a Zero Balance
I always tell clients that all accounts in their name, with or without a balance, will be closed. On occasion, a client tells me he or she was able to continue using a card that had a zero balance even after filing the case. I believe this can sometimes be an exception to the rule.
Today, there are only a few companies processing credit card payments. You can have 10 different credit cards with 10 different companies, but the payment may be processed by one of only a few companies. Once the company receives notification that you filed bankruptcy, all accounts under your Social Security number are flagged and closed.
The account can also be closed even if the creditor doesn't immediately receive bankruptcy notification. Most creditors look at your credit report each year to see whether you are eligible for a credit line increase or a balance transfer offer. When this happens, the creditor will see that you filed bankruptcy and has the right to close out the account.
As I have said many times before, you can file bankruptcy with the assistance of a licensed attorney, but you also should know what I know about your case. If you have made large payments to family or creditors prior to filing, you could be setting yourself up for a horrible bankruptcy experience. You may benefit from a consultation with an attorney.