26 Feb Will Settling Some Debt Make My Bankruptcy Look Better?
Sometimes it’s hard to give up old habits. Paying debts feels right. Even when it’s right and necessary. Filing bankruptcy still feels like it out to be “wrong.”
So sometimes folks ask us if it would look better — to the court and to future lenders — if they paid off or settled some debts before filing bankruptcy.
Indeed, my friend Cathy Moran wrote this week about a similar question from a client and made some useful points I encourage you to check out.
As far as your future credit goes, it probably doesn’t matter. Bankers are not usually making a personalized value judgment about you as a person when deciding to give you new credit. They rely on credit scores and automated systems that focus on things like your current income and handling of new or on-going debt. If you eliminated most or all of your debt through bankruptcy, you start over with a clean slate. Whether you made a couple creditors slightly better off with payoffs or settlements prior to the fresh start means little or nothing to those models.
There are creditors you may want to pay off precisely because you are filing bankruptcy and you don’t want to “hurt” them. Like friends and family members. But paying them off before filing may get them sued for a preferential payment. So it’s probably a bad idea. You can always repay them after your case is over, it’s just usually a bad idea to do so before filing.
And there are always some exceptions to any general rule. For example, a family doctor you want to have access to in the future. A landlord who might give you a good recommendation for future leases. A bad check creditor who might be able to prosecute you! There are various examples depending on your circumstances that are worth discussing with your lawyer to see if it makes sense and how to do it without creating more problems.
But ultimately if a creditor or a debt settlement company suggests you do the “right thing” before filing bankruptcy by paying or settling some bills, think again about what else you could use that money for that will help you rebuild and have a real fresh start — a material improvement rather than an illusion that profits only the lenders who already refused to help you avoid bankruptcy.
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