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Paying a Favorite Creditor After Filing Bankruptcy

Jan. 11, 2013

In general the law allows you to play favorites after you file bankruptcy by paying off a certain creditor or two who you feel special loyalty towards. But there are situations when you can’t. Or certainly shouldn’t.

The Basic (and Misleading) Rule

The Bankruptcy Code says it in black and white: “[n]othing . . . prevents a debtor from voluntarily repaying any debt.” But that’s misleading, because in some situations that simply is not true.

But let’s back up for a second. This whole discussion is NOT about secured creditors who you need to pay so that you can keep the collateral it would otherwise repossess or foreclose on. And it’s NOT about paying a creditor whose debt you can’t write off—such as child support or certain taxes. Instead this is about favoring a creditor you have no legal obligation to pay after legally discharging the debt in bankruptcy.

The More Thorough Rule

You are allowed to pay your favorite creditor to your heart’s content after getting a discharge of your debts at the end of your bankruptcy case. Paying that creditor during the three months or so between filing a Chapter 7 case and the discharge is also okay,you’re you are not allowed to do this during the 3 to 5 years of that period in a Chapter 13 case.

The Reason for the Big Difference between Chapter 7 and 13

The reason comes from the basic difference between these two options. Chapter 7 is a “liquidation” that focuses in on your assets on the day your case is filed, and so cares little about what you do with your money after that point. In contrast, Chapter 13 is an extended payment plan that focuses on your ability to pay your creditors during the whole 3 to 5 year plan. In a Chapter 7 case, paying a debt that is about to be or has already been written off is your business because it doesn’t affect the rights of your other creditors. But in a Chapter 13 case you’re already paying all your “monthly disposable income” for distribution by the trustee according to a carefully constructed and court-ordered plan. You’re not supposed to have any money to spare on a favorite creditor, and even if you did you aren’t allowed to do favor that creditor. You CAN favor a creditor eventually, but only AFTER the case is completed years later.

Therefore . . .

If you think your highest priority is to start making payments to a special creditor right away or very soon after filing bankruptcy, you’d have to file a Chapter 7 case instead of a Chapter 13 one.

But is that really your highest priority? Of course instead that highest priority is to put your financial house in order. Whether it’s best for that purpose to file a Chapter 7 or 13 case depends on all your financial circumstances. So if Chapter 13 is really the right option for you, filing a Chapter 7 case just to allow you to pay one or two favored creditors is very likely not a wise move.

Your motivation to pay a favored creditor—whether a relative, a friend, a long-time doctor . . . whoever—is probably highly honorable. Tell your attorney about your feelings and goals, and he or she may well find a way to resolve the situation meeting both your legal and moral obligations.