Although the economy has improved in the last few years, there are still millions of Americans facing unemployment and high credit card debt. Recently on our bankruptcy forum a user asked, “I have been unemployed for six months. I have spent my emergency savings, and I am living off my credit cards. If I decide to file for bankruptcy protection should I keep making credit card payments or should I focus on paying my mortgage bills and keeping my home?”
What debts do I pay first if filing bankruptcy?
Filing bankruptcy should be a last resort after you have reviewed all of your other financial options. With that said, it is a legal means to discharge certain unsecured debts and may be the only option you have to get back on your feet.
Now, you specifically asked about the hierarchy of debts you should repay. The bad news is if you stop making debt payments for any debts you can expect harassing collection calls, letters, and eventually a legal case filed against you.
The good news is that because the credit card company is an unsecured creditor they will not be able to immediately come and take any of your possessions. In fact, there is no collateral tied to the unsecured credit card debt. Now, they might eventually file suit against you and have the court issue a judgment- which could lead to wage garnishments (in some states), bank account levies and liens- but this will take some time and effort on their part.
The mortgage company, however, has issued you secured debts, which means they have collateralized the loan they gave you with your house. If you stop making mortgage payments they can immediately foreclose on your home, repossess it, and sale it.
With this in mind, if you are considering filing for bankruptcy protection, it is never a good idea to pay credit card bills before the mortgage.
What happens to credit card debt after I file bankruptcy?
Now that you understand how to prioritize your mortgage payment over your credit card payments it’s time to take a closer look at what will happen after you file for bankruptcy protection.
If you decide to file for Chapter 7 bankruptcy you need to talk to a lawyer about how to protect your home. Some states will provide homestead bankruptcy exemptions which offer protections. The key here, however, will be to stay current with your mortgage payments. If you are behind on your mortgage when you file Chapter 7 bankruptcy, the bank can still foreclose once the case is closed or when the automatic stay is lifted.
What will happen to my credit card debt after Chapter 7 bankruptcy?
If you qualify for Chapter 7 bankruptcy unsecured debts, such as credit card debts, are generally discharged. If the credit card company has a judgment against you bankruptcy can also discharge the judgment.
For this reason, if you have to make a choice before you file Chapter 7 bankruptcy, it’s always preferable to keep making your mortgage payments and stop making credit card payments.
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