Can I pay some debts outside of bankruptcy?

This is a tricky question. First, some payments that you make before you file might backfire. The trustee is permitted to set aside certain prepetition payments as preferences. When this happens the trustee often sends a letter to the creditor and asks for the money. If the creditor refuses to hand it over, the trustee can sue the creditor to recover it. This money becomes part of the bankruptcy estate and can be distributed to other creditors unless you have an exemption to cover it. Second, after you file your petition, you can pay whomever you like, but it seldom makes sense unless there is a bankruptcy reason to do so. In a Chapter 13 bankruptcy, your plan may include some payments that are “outside” of the plan. This doesn’t technically mean that the payments are outside of the bankruptcy. What it means is that you will make the payments directly to the creditor instead of paying the money through the trustee. This arrangement makes sense, for example, in situations where the trustee is not timely in paying your mortgage and you want to pay it directly to the mortgage company to make sure you do not end up with late payment marks on your credit report. Another reason to pay a debt “outside” of the bankruptcy is that the debt arose after you filed. Chapter 13 bankruptcy imposes strict limits on new credit, but some debts, like medical bills, are unavoidable. These debts survive bankruptcy and you should pay them.

If you had a secured debt before bankruptcy and want to keep the debt despite bankruptcy so that the creditor does not go after a co-signor, you can still pay the debt outside of the bankruptcy. The procedure for “keeping” the debt is called reaffirmation. Essentially, you sign an agreement with the creditor to keep the debt and agree that it not be discharged in bankruptcy. In addition to the payments you are required to make on other debts that are included in the bankruptcy, you will have to make the payments on the reaffirmed debt as well. In order to get the bankruptcy court to approve the agreement, you will need to demonstrate an ability to make both sets of payments.

Case Studies: Paying Debts Outside of Bankruptcy

Case Study 1: Prepetition Payments and Preference Claims

A debtor made payments to a creditor before filing for bankruptcy, hoping to address certain outstanding debts. However, these prepetition payments were considered preferences and could be set aside by the bankruptcy trustee. The trustee requested the creditor to return the funds, which would then become part of the bankruptcy estate and distributed to other creditors.

It highlights the importance of understanding the potential consequences of prepetition payments and consulting with a bankruptcy attorney before taking such actions.

Case Study 2: Outside Payments in Chapter 13 Bankruptcy Plan

In a Chapter 13 bankruptcy, a debtor had a mortgage payment included in their repayment plan. However, due to concerns about the trustee’s timely payment, the debtor chose to make mortgage payments directly to the lender.

This arrangement allowed the debtor to ensure timely payments and avoid negative marks on their credit report. It demonstrates how certain payments can be made “outside” of the bankruptcy plan while still being part of the overall bankruptcy process.

Case Study 3: Reaffirmation of Secured Debt

A debtor sought to keep a secured debt despite filing for bankruptcy, aiming to protect a co-signer from potential creditor actions. Through a reaffirmation agreement, the debtor and the creditor agreed to exclude the debt from discharge in bankruptcy.

However, the debtor needed to demonstrate the ability to make payments on both the reaffirmed debt and other debts included in the bankruptcy plan. This case study emphasizes the importance of carefully considering the financial obligations and seeking court approval for reaffirmation agreements.