Debunking 14 Bankruptcy Myths
If you are contemplating whether a bankruptcy filing might be a solution to your financial problems, the whole concept can seem overwhelming because you might not have any frame of reference other than the bits of information that you’ve picked up here contacting us today!
Myth 1: Under the NEW(ish) Bankruptcy Code, it is almost impossible to file a bankruptcy petition.
Fact: This is not true. Some also believe you cannot discharge credit card debt or that it is impossible to file a Chapter 7 petition or you will be forced into a repayment plan, but these notions are also false. In 2005, Congress made changes to the Bankruptcy Code. Even though that happened 12 years ago, and it feels like we are still dealing with the fallout, most people who were eligible to file Chapter 7 before the change are still eligible after the change. It is true that the advance preparation prior to filing can be more rigorous, but most people will still be able to file for a Chapter 7 bankruptcy protection. The truth is that you can do almost everything under the NEW law that you could do under the OLD law.
Myth 2: Everyone Will Know You Have Filed For Bankruptcy.
Facts: Unless you’re a prominent person or a major corporation and the people who you tell. While it’s true that your bankruptcy is a matter of public record, the number of filings is so massive, that unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed.
Myth 3: You Will Lose Everything You Have.
Facts: Nothing could be further from the truth. Most people who file bankruptcy don’t lose anything either because (a) the value represented by the asset is protected under state exemption law or (b) there is no value (equity) and personal injury claims, food storage (this is Utah after all) just to name a few categories.
And if there is property that is not exempt from the reach of creditors, you may still be able to keep the property and paying creditors what each creditor would receive in a hypothetical liquidation. It is important to remember that filing bankruptcy does not generally wipe out valid secured liens.
So if you want to keep a car, truck, home or business equipment that serves as collateral for a loan, you need to keep paying on the debt. You may also need to reaffirm the debt, depending on your particular situation. If you have questions about how this works, feel free to set up a free consultation.
Myth 4: You Will Never Be Able to Own Anything Again.
Facts: This is false. A bankruptcy filing does not prohibit you from owning property. In the future, you can buy, own and possess whatever you can afford. In fact, by getting rid of your debt, it may be easier for you to obtain property in the future without the fear of seizure by judgment creditors.
Myth 5: You Will Never Get Credit Again.
Facts: Although it seems counter-intuitive, in almost all cases where my clients maintain their employment and better.
A bankruptcy discharge puts you in a position to hand protection against any future financial calamities.
Myth 6: Filing Bankruptcy Will Hurt Your Credit For 10 Years.
Facts: This is not true. This myth confuses two concepts: The fact of your filing and the effect of your filing.
- When you file a bankruptcy petition, the fact of the filing can stay on your credit report for up to 10 years, but
- The effect a bankruptcy filing has on your credit score diminishes over time. The farther away in time that you get from your discharge date, the more improvement you will see in your credit score and ability to borrow at market rates.
Just because something is reported on your credit report does NOT necessarily mean it will have a permanently negative effect on your credit standing.
Also, keep in mind, by the time you make the decision to consult a bankruptcy attorney, your credit score has probably taken a few hits (judgments, repossessions, late payments) or your credit limits have been maxed out or both. Most debtors we help have a very low credit score anyway. A bankruptcy filing helps them clear off their old debt so that they can start rebuilding their credit.
Myth 7: If You’re Married, Both You & Your Spouse Have to File for Bankruptcy.
Facts: Not true. In many cases, where both husband saves money for them to both file together. But it is never a requirement under the law. We have many cases where only one spouse files. The good news is that generally, if it makes sense for both spouses to file together they can both file for the price of one filing.
Myth 8: It’s Really Hard to File for Bankruptcy.
Facts: This myth is only true if you are trying to do it yourself. Especially under the 2005 reform act, there are many requirements that did not exist previously and you know exactly what to expect. More importantly, a competent attorney can help you protect assets to the greatest extent possible under the law.
Myth 9: Only Deadbeats File for Bankruptcy.
Facts: This is not true. One study found that 80% of people filing bankruptcy were forced to do so as a result of either job loss, a recent divorce or medical bills. Most of the people who file bankruptcy are good, honest, hard-working people, just like you and me, who file as a last resort.
Myth 10: Filing a Bankruptcy Petition Means you’re a Bad Person.
Facts: Not true. Bankruptcy was created to give people who have fallen on hard times a “fresh start.” Even those who are fiscally responsible can find themselves struggling with debt due to no fault of their own. I look at the Bankruptcy Code as just another tool in the big box of financial planning tools. It is a tool a last resort, but it is available for that very specific purpose. It makes no sense to not even consider a tool that is best suited for a particular purpose because of perceived stigma or because your parents would never approve. If you need the help, ask for help.
Myth 11: Even if You File for Bankruptcy, Creditors Will Still Harass You & Your Family.
Facts: This is NOT true. In fact, nothing could be further from the truth. The minute you file bankruptcy, the Bankruptcy Code provide an “automatic stay” against further collection attempts of creditors. No more phone calls. No more collection letters. No more lawsuits. No repossessions. No foreclosures. Nothing.
The automatic stay prohibits any and penalties. Once you file for bankruptcy relief, creditors must back off or suffer the consequences.
Myth 12: You Can’t Get Rid of Back Taxes Through Bankruptcy.
Facts: You can get rid of some old taxes through bankruptcy. By “old,” we mean income taxes more than 3 years old resulting from timely filed returns. Under the law, there are 3 or 4 qualifications that have to be met, but once these are met, these taxes can be wiped out. Please note: Filing bankruptcy does NOT get rid of your personal responsibility to pay wage withholding or sales taxes, no matter how old the debts have become.
Myth 13: You Can Pick & Choose Which Debts & Property to Disclose in your Bankruptcy Filing.
Facts: This may be the most persistent myth out there and all income you earn. Period. End of Story.
Under the law, when you file for the extraordinary relief provided by the Bankruptcy Code, you must list all your property and that you to pay a pre-filing debt, but you can voluntarily offer to repay from post-filing earnings.
Myth 14: Under the NEW Law, You Cannot Discharge Credit Card Debt.
Facts: Nothing could be further from the truth. You can still discharge credit card debt. I’m not sure how this myth got started, because nothing in the new law even suggests that credit card debt cannot be discharged. The fact is that all credit card debt is dischargeable, except for a few very narrow circumstances, all of which are essentially the same as the old law. If you could discharge credit card debt under the old law, you will almost assuredly be able to discharge it under the new law. When a debt is “discharged,” that means you no longer owe the debt, i.e., you are discharged from your obligation to pay and never reach a final resolution or forgiveness of debt.