Does It Matter if You File Bankruptcy Before or After Your Credit Cards Go to Collections?

By Michelle Hart

In tough economic times, many Americans find it difficult to make all of their debt payments on time. Some consumers may seek relief through bankruptcy, a legal process that temporarily halts collection activity and discharges the majority of consumer debts. If you are considering bankruptcy to clear mounting credit card bills, you may not realize there are specific guidelines for this type of debt. Through proper timing, you can ensure all credit card debt is included in the proceedings, and at the same time, minimize the negative impact of bankruptcy on your personal credit.

Credit Cards and Collections

While delinquent credit card payments usually appear on a consumer's credit file once the consumer is past due by 30 days or more, most credit card companies do not send an account to collections until it is six months past due. If a credit card company sends your account to an outside collection agency, the collection agency may insert a separate collection tradeline on your credit file. You can avoid the "double-whammy" of having two negative tradelines for the same credit card account by filing a bankruptcy petition and notifying the credit card company of the pending bankruptcy before the account becomes 180 days past due.

Filing for Bankruptcy Grants Relief from Collection Activity

Filing a bankruptcy petition entitles consumers to an "automatic stay," granting relief from collection activity by any creditor named in the petition. Because it will take time for the bankruptcy court to process the petition and begin notifying individual creditors of the pending proceedings, you may notify creditors yourself to halt collections activity immediately. The automatic stay applies to collection activity on credit card accounts, installment loans, secured accounts such as mortgages and vehicle loans and, in most states, evictions.

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Credit Card Charges in the 90 Days Before Bankruptcy

Federal law governs exceptions to debts that may be discharged in bankruptcy. Consumers are not entitled to relief from credit card debts totaling more than $500 in luxury goods or services to a single creditor within the 90 days immediately preceding bankruptcy. If you charge more than $500 on a single credit card in the three months prior to bankruptcy, but can prove at least some of the charges were for necessities such as food or medications, the bankruptcy trustee may grant discharge of those amounts.

Credit Card Payments in the 90 Days Before Bankruptcy

If you are able to make the minimum payment on a credit card in the 90 days immediately preceding a bankruptcy filing, you will prevent the account from going to a collection status. Courts frown upon a consumer showing favoritism to one creditor over another during bankruptcy, so if you plan to file a petition, you should be careful not to make excessive payments to one creditor while ignoring another. Once the initial petition is filed, the bankruptcy trustee may choose to recall any excessive payments made to individual creditors in the 90 days immediately preceding the filing, and redistribute the total amount evenly among all creditors.

Impact of Collection Accounts and Bankruptcy on Credit Rating

Because collection agencies have little incentive to remove a negative tradeline from a credit report, you should attempt to protect accounts from entering a collection status if at all possible. The appearance of two negative tradelines on a credit file for the same original account can be extremely detrimental to your credit score, and can cause an even greater score drop than bankruptcy alone.

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Can I Be Sued After Chapter 7?
 

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Advantages & Disadvantages to Declaring Bankruptcy

Bankruptcy is a court process available by federal and state laws to help both individuals and businesses shed unsustainable debt and get back on their feet financially. It offers a second chance at a clean financial slate, but it also has disadvantages. Bankruptcy may not be your only option to resolve your debts, but its advantages may outweigh the disadvantages in your particular situation. You may wish to consult an attorney before deciding whether bankruptcy is the best option for you.

What Does It Mean if a Bankruptcy Is Lifted?

When an individual debtor files for Chapter 7 or Chapter 13 bankruptcy, creditors must immediately stop their collection efforts. Creditors sometimes may attempt to get around this ban by petitioning the bankruptcy court to "lift" the stay. A bankruptcy lift allows the creditor to continue collection activity, such as garnishing wages or foreclosing on a home, while the bankruptcy case is in progress.

Bankruptcy Filing Vs. Discharge Date

The bankruptcy filing date is the date when you file the petition for bankruptcy with the court. By contrast, the discharge date occurs toward the end of the process. How long it takes to get from the filing date to the discharge date depends on which type of bankruptcy you file. Chapter 7 is debt elimination and may take only a few months. Chapter 13 involves a debt repayment plan and it may take years until your remaining debt is discharged.

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