People often want to keep one or more of their debts "out of" their bankruptcy. Maybe it is a low- or zero-balance credit card they'd like to keep. Maybe it is a debt owed to Mom and they want to keep paying Mom back during the bankruptcy.

When a person files bankruptcy, however, they must disclose (or "list" or "include") all of their debts owed as of their bankruptcy filing date.

Listing Debts in Bankruptcy is a Two-Step Process

Giving the bankruptcy court information about your debts is a two-step process. Step one is disclosing all debts. Step two is determining what is going to happen with the debt. In most cases, unsecured debts will be discharged in the bankruptcy. (Some student loans, some taxes, and domestic support obligations are examples of unsecured debts that are typically not discharged in bankruptcy.)

"Including" Vehicle Loans in Bankruptcy

Sometimes people will say "I'm not including my car loan in the bankruptcy." But, it is important to remember that the car loan must still be disclosed. You can then tell the court what you want to do with the loan. Options vary depending on your jurisdiction and the chapter under which you filed bankruptcy (usually Chapter 7 or Chapter 13.)

Can I Keep a Zero-Balance Credit Card When I File Bankruptcy?

All credit card accounts will be closed when a person files bankruptcy-- even if there is a zero balance.

This is because the credit card issuer is not permitted to accept payments from the bankruptcy filer after the bankruptcy is filed. If they left the account open for use but could not accept payment, that would quickly become a bad situation for the credit card issuer.

Credit card companies pay monitoring services to alert them when one of their credit card holders files bankruptcy. They monitor using social security numbers. So, even if you neglect to list an account, the bankruptcy will still be detected and the account will still be closed by the issuer.

Ok. Can I keep the debt "out of" my bankruptcy by paying it off just before I file bankruptcy?

The answer to this question will depend on many factors and is very case-specific. Some of the factors include:

1. Was the bankruptcy filer still paying all their bills when they made the payment?
2. How much was the debt that was paid off?
3. How much were the bankruptcy filer's other debts?
4. Was the person insolvent when they made the payment?
5. Did the creditor who accepted the payment know the person was insolvent when they made the payment?
6. Who was the creditor? There are specific rules for payments made to family members, business partners, and other insiders.

How does paying off some debts before filing bankruptcy affect my credit?

Let's assume a potential payment does not raise preference payment or fraudulent transfer issues. Bankruptcy filers often ask whether it would be better for their credit to pay off some loans (and thus include fewer debts in the bankruptcy.)

It is very unlikely that paying off small debts before filing bankruptcy would be "better" for a bankruptcy filer's credit score. The bankruptcy itself-- although not viewed by the FICO scoring model as a positive event-- has an overall positive effect on credit scores because it zeros out the underlying debts. So, their credit score is going to go up shortly after filing bankruptcy anyway. Assuming they can exempt the funds in the bankruptcy, it is often better to conserve the funds they would have used to pay off the small debts.

Schedule a Free Consultation

To schedule a free consultation with bankruptcy attorney Karen Ware, call 805-284-0760 (Oxnard office) or 818-668-9019 (Thousand Oaks office) or use our online scheduling tool.