One of the last questions I get during a consultation is whether or not someone should stop paying their creditors before they file bankruptcy.
This seems like a simple question, but it does present a small ethical quandary for a bankruptcy lawyer. Some years ago, the United States Supreme Court wrote that a lawyer can’t encourage someone who is considering bankruptcy to take on additional debt. Since a person can incur additional fees and interest when she stops making payments, she is incurring additional debt.
So, I’ll never tell you that you should stop paying your creditors.
What If I Have Already Stopped Paying My Creditors?
First, if you have already stopped paying your creditors or can’t afford to pay them, then the answer probably doesn’t matter. You’ve already defaulted. Collection calls have probably already started. You may have been served with a lawsuit. If things haven’t started snowballing, they will. My best advice is to prepare for bankruptcy. Collect all the information your attorney needs. Start saving for your bankruptcy costs. The other option, of course, is to find a way to get the accounts into good standing if you don’t think bankruptcy is a good option.
What Happens After I Stop Paying My Creditors?
But if you are still making payments on their loans and credit cards, I’ll tell you what will happen if you stop making payments.
First, your creditors will start calling. They want to see if there are any problems and ask why you haven’t made your payment. Unless you make a payment right then, the creditor will start calling more often. It could be several times a day. It doesn’t really matter if you talk to them. The creditor just wants you to pay them. If you’re unable to make a payment, that conversation is pointless. You might as well try to change their religion. It’s not going to happen.
Second, your creditors will fill your mailbox with letters reminding you that your payments are delinquent. They’ll use a different color paper to really get your attention. Again, if you can’t afford to make a payment, there isn’t much to do with these statements. You might be thinking that you should pay them something, anything, just to keep them happy. The only thing that will make them happy is if you make a full payment as required by your contract. Unless you make a complete payment, your account will still be in default and they are going to continue bugging you.
Your creditors will keep this up for several months, and then, suddenly, they’ll stop. Just when you think that maybe they’ve forgotten about you or decided not to try and collect what you owe, you’ll get another letter.
This time it will be from a lawyer. It’ll have very specific language. In effect, it states that you owe a debt and that you have 30 days to ask them to verify the debt. If you don’t ask them to verify the debt, they’ll assume that it is yours and they plan on moving forward with their collection efforts. Spoiler alert, even if you ask them to verify the debt, they’re still going to come after you.
Now is when things start to get unpleasant. The next thing you can expect is for them to serve a lawsuit. Service in Colorado means that someone has to hand you the complaint (legal paperwork telling the court why they believe you owe them money). They can also hand it to any other adult who lives with you and certain people at your employer (awkward!). You’ll have some time to respond to the lawsuit, usually around three weeks.
Your options at this point are limited. You can file bankruptcy and that will stop the lawsuit. You can call the attorney for the creditor and ask for a payment plan. You can file a response to the lawsuit, but unless your argument is that it isn’t your debt, you’re just delaying the inevitable.
Finally, you can ignore the lawsuit. This is the least good idea. This is a bad idea. What happens then is that the court will give the creditor an order awarding them judgment in their favor. Now they have a piece of paper that gives them authority to do bad things, like take money out of your bank account or paycheck. Next thing you know, you’re late with your rent or your bank account is overdrawn and racking up hundreds of dollars in overdraft fees or you can’t afford to buy groceries.
So, if someone asks me if they should stop paying their creditors, this is what I tell them: Bad things will happen if you stop paying them and don’t move forward with filing bankruptcy. You shouldn’t stop paying your creditors unless you have absolutely decided to move forward with bankruptcy and have hired a lawyer.
Should I Tell My Creditors I’m Going To File Bankruptcy?
I get this question a lot. I really don’t think it matters much. People are concerned that if they tell their creditors they’re going to file bankruptcy, the creditor will rush a lawsuit. In my experience, this doesn’t happen. I think the opposite it true, actually. I think it will either not affect what the creditor does next or it might even buy you some time. If the creditor does hire a lawyer and file a lawsuit and then you shortly thereafter file bankruptcy, the creditor is going to lose all the money they paid to their attorney. If they garnish you before you file, there’s a chance the creditor will have to give that money to the bankruptcy court. In my experience, the creditor will note that you are going to file bankruptcy and then revisit the account in a few weeks. If you’ve hired a lawyer, they’ll call the lawyer to confirm they’re representing you. Remember, the creditor won’t stop coming after you until your bankruptcy is filed. Hiring a bankruptcy lawyer doesn’t guarantee the creditor will stop anything.
Bankruptcy is the most powerful weapon you have to get your finances in line. If you’d like to know how bankruptcy can help you, schedule a free consultation with an experienced Denver, Colorado bankruptcy attorney. You can make an appointment by clicking here.