Should I Pay My Credit Card Bills?
The economic downturn caused people from all walks of life to turn to their credit cards as a life raft, hoping they could keep bills current with the plastic until a new job came around. Thankfully, sometimes that new job does pop up and the credit card bills don’t look so scary.
Unfortunately, these days unemployment is still an issue, and so are credit card balances. In many cases, families simply cannot afford to make even minimum monthly payments on their credit card bills. Thanks to interest rates that would make Tony Soprano proud, balances spiral out of control. Many are left with the unpleasant choice of paying the mortgage or paying the credit card companies. There is simply not enough money to pay both. After a period of intense harassment over the phone, a summons appears on the front door. Your credit card company has filed suit. What to do now?
Create a Hierarchy: Pay Mortgage Before Credit Cards
As a Charlotte bankruptcy attorney, I hear some unpleasant stories about creditor harassment. Try to ignore the harassment you’re likely being subjected to. Yes, they’re calling your Mom and even your pastor. Nevertheless, It is usually never a good idea to pay credit card bills before the mortgage. Let me explain. Credit card debt is a type of unsecured debt, meaning your failure to pay will not result in any immediate loss of property.
As mentioned in the “all too familiar story” above, your credit card company will actually have to file suit to come after your property and even then exemption laws will operate as a protective shield for your assets. You might even be judgment proof. Discuss the matter with your bankruptcy attorney, but the bottom line is this: your credit card company will have to work very hard to attach your assets. By contrast, failure to pay the mortgage will result in foreclosure, the dreaded legal reclamation of your home by the bank. It’s that simple. You don’t pay, you lose your home. Now comes the hierarchy. Clearly, maintaining a place to live is more important than feeding Citibank its monthly interest “points.” Need to get to work? Well, you might want to place car payments above the credit cards as well.
Not a Good Choice + The Solution
It’s no fun having to pick and choose which bills to pay. Ideally, you pay all your bills and don’t worry about it. Unfortunately, this economy has provided us all with unique challenges. When times get tough, prioritize. You’re going to need a place to live, you’re going to need transportation to get to work. Don’t let the hardball tactics employed by credit card companies scare you. It is important to understand how different types of debt are treated in bankruptcy.
Generally speaking, if you wish to retain property that serves as collateral for a loan (secured debt) such as a home or car, you will have to make monthly payments after bankruptcy. For example, filing for chapter 7 will not remove the mortgage lien from your house. If you are behind when you file, the bank can still foreclose once the case is closed or when the automatic stay is lifted. By contrast, filing for chapter 7 bankruptcy will wipe out your credit card debt completely. In fact, credit card debt is one of the easiest types of debt to eliminate in bankruptcy. Your credit card company knows this and they charge a premium for the added risk in the form of huge interest rates.
Why should credit card debt be a low priority in times of financial distress? Because it is easily eliminated in a bankruptcy filing. In other words, chapter 7 will likely cure your credit card problems. Mortgages and car loans are a different story. Falling behind on these secured debts may result in the loss of a home or car.
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.