When my firm is retained to file bankruptcy for clients, our clients refer their creditors and collection calls to our office. When they call, most creditors merely confirm we have been retained, ask us when we can expect to file their bankruptcy petition, and then hang up. But lately, some creditors are asking if our clients would like to “settle” their credit card debts instead of filing bankruptcy. These creditors are not too swift.

Most clients have more than one debt, and many clients have a mortgage (or two). How can settling with one account benefit the client at all?

Perhaps more importantly, such payments might be considered preferential under the bankruptcy code. Payments made to any regular creditors that total $600 or more within the 90 day period prior to filing must be disclosed on the Statement of Financial Affairs. These are considered “preferential” payments.

In bankruptcy, all creditors are treated equally, and if the debtor knew he was in financial distress on the day he filed bankruptcy, chances are he knew it 90 days prior to that. Therefore, any large payment would confirm that the debtor preferred one creditor over another. In those cases, a Chapter 7 Trustee would be entitled to get that payment returned so it can be distributed to the rest of the creditors. So the client is out the money, and the creditor is forced to give turn it over to the Chapter 7 Trustee.

So where’s the motivation for our clients to settle? There is none. Clients get no benefit from settling any debt prior to filing their petition. If anything they are throwing money away that could be used to get them back on the road to financial wellness. The only benefit goes to the rouge credit card company or collection firm that gets the money. And depending on the payment amount, they only have it temporarily.