Bankruptcy Myths

Bankruptcy can seem scary, especially if you’ve heard many of the myths and misconceptions about bankruptcy. With more and more people needing the debt relief of bankruptcy, it is important for them and their friends and family to know the truth.

The law has changed; there is no more bankruptcy.

Not true. The new law introduced more steps and more paperwork, but there are also more benefits.

Everyone will know you filed for bankruptcy.

Bankruptcy is part of the public record, but there is so much information on so many filings, the only people who will likely know are your creditors and the people you choose to tell.

You will lose everything you have.

My clients rarely lose their home, land, vehicles or other secured property. In actuality, most of my clients keep all the stuff that they want to keep. The only things they lose are all the credit card debt, personal loans, lawsuits, foreclosure deficiency, repossession deficiency, payday loans, medical bills, co-signed debts, etc.

You will never be able to own anything again.

Absolutely false. Your credit and ability to buy will return quickly. Many of our clients are offered new credit cards and car loans as soon as debts are discharged.

Bankruptcy Will Ruin Your Credit

Not true. Getting rid of debt through bankruptcy makes you a good credit risk. Bankruptcy helps you rebuild the credit you lost.

This is a pervasive myth in bankruptcy – that if you file a bankruptcy you will never be able to obtain credit or get a loan again. And it is simply not true. Yes, a bankruptcy will affect your creditworthiness for a period of time, but not forever. How quickly your credit can improve is based upon how proactive you are at building it back up after a bankruptcy discharge. First, consider the improvement you will gain simply by accounts with balances being wiped out with a zero balance, especially charged off debt that is impairing your credit score. Once the accounts are reduced to zero, your debt to income ratio instantly improves. While the bankruptcy filing itself will be listed in the public record section of your credit report, and therefore will have some impact on your credit score, you can still improve your creditworthiness immediately after completing a bankruptcy. One way to do that could be with a secured credit card. If you apply with a credit card lender that will report the account to the credit reporting bureaus, a secured
credit card can immediately begin improving your credit without the risk of running into trouble with the account. The reason for this is you will have paid the credit card issuer a sum of money that stands for your credit line. If you charged on the account and failed to pay, the credit card
company simply takes the funds it is holding to satisfy that debt. Finally, creditors also know that a Chapter 7 bankruptcy can only be obtained once every eight years. Once you complete a bankruptcy it will be some time before you can qualify again for that Chapter 7 relief and the
creditor may feel more comfortable in extending credit to you as a result.

Filing bankruptcy will hurt your credit for 10 years.

Bankruptcy will be reported on your credit report for 10 years, but most people’s credit scores improve after filing. Many lenders feel that your problems are behind you.

If you’re married, you both have to file.

This one scares a lot of people, but is entirely false. A married person can file Bankruptcy by themselves and leave their spouse off the petition. The law allows anyone to file Bankruptcy, either individually or jointly. The Court will want to know the income from the non-filing spouse if he or she is employed or receives income of any sort, but they do not have to file, nor will the Bankruptcy have anything to with them. The non-filing spouse’s assets do not have to be listed as long as they are solely owned by the non-filing spouse. It is true that a lot of the time, the debt is in both the husband and wife’s names, so they both need to file, but it is not required. If all of the debt is in one spouse’s name, there is no need for both the file and they both shouldn’t file.

It’s hard to file bankruptcy.

No, it isn’t. That myth started when the law was changed, but it isn’t difficult at all. An experienced attorney can make sure your filing meets all the rules.

Only deadbeats file for bankruptcy.

No, absolutely not. The overwhelming majority of filers are good, decent, hard-working people who ran into some insurmountable financial problems brought on by an illness, divorce or separation, a business failure, loss of a job or bad judgment at a young age.

Filing bankruptcy means you’re a bad person.

No. More than 1 million Americans file for bankruptcy every year. It is a straightforward, honest, legal way to deal with debts that cannot be paid.

You can only file for bankruptcy once.

This is false. The law does limit the time frame in which you can receive a discharge in a subsequent case, but not the number of times you can file in a lifetime. You can receive a discharge in a Chapter 7 once every eight (8) years. You can receive a discharge in a Chapter 13 theoretically every two (2) years. If your previous discharged case was a Chapter 7, you must wait four (4) years to receive a Chapter 13 discharge. If your previous case was a Chapter 13 discharge, you must wait six (6) years from the filing date of your 13 to receive a Chapter 7 Discharge unless the previous 13 paid unsecured creditor claims at a 70 percent clip. Now I did not say it wasn’t confusing, but you can file many times in a lifetime if needed and filed in good faith.

Even after you file, creditors will harass you and your family.

Not true at all. The bankruptcy court orders all creditors to leave you alone. This “automatic stay” means no phone calls, no letters, no lawsuits, no repossessions, no foreclosures. Once you file, creditors must leave you alone or face consequences from the federal bankruptcy court.

You Can Exclude Credit Card and Other Debts From Your Bankruptcy

I often have clients ask me if they can keep a current credit card account by not listing it in their bankruptcy filing. The short answer is no. The Bankruptcy Code includes a requirement that you list in your bankruptcy petition, and by doing so notify, any creditor to whom you ow money. When you file a bankruptcy case, you sign a document that the information you have included in your bankruptcy petition is true and correct under penalty of perjury. This means that if you have not been truthful in your information or have left out required information, you could be criminally prosecuted for that untruthfulness.

But there are still solutions that you can pursue to provide a line of credit that you can utilize, for example, in the event of an emergency. Chapter 7 bankruptcy cases are pending for approximately 3 to 4 months. Even if you must list a credit card in your Chapter 7 that you would have liked to keep out of the bankruptcy proceeding, when you exit the Chapter 7 you can obtain a secured credit card. A secured credit card is where you pay a deposit to the credit card issuer in return for a line of credit equaling the deposit. You cannot generally get in to trouble with this new account because it will likely be a small limit tied to your deposit and if you do not pay the account as agreed, the credit card company simply uses the deposit to satisfy the
outstanding balance. In addition, you can research the secured credit cards available to obtain a card where the card issuer will report to your credit report. This will assist you in rebuilding your credit after bankruptcy.

If you file a Chapter 13 bankruptcy petition, you cannot incur new debt while you are in your repayment plan unless you first obtain permission from the bankruptcy court or trustee. However, you can set aside a lump sum of money that you have saved or perhaps received from an income tax refund, for example, in a separate bank account from your primary account. You can then set up a debit card on the new separate account and use the debit card if you experience an emergency or need to pay an expense online.

Home Was or Was Not Included in Bankruptcy Petition

Many time I have current clients or prospective clients who have filed a bankruptcy petition in the past tell me their home was not included in their bankruptcy petition. This is simply not true. The Bankruptcy Code requires that all assets, including a residential home, be listed in the bankruptcy schedules and, if any debt is owed on the home, the lender on the mortgage must be included as a creditor. This myth persists primarily because homes are generally financed on 30 year mortgages. Because this is a long term debt, versus a debt that would be paid off in a short period of time, it has a different treatment under the Bankruptcy Code than most all other debt. Sometimes folks think that their home is completely excluded
simply because it is their home. In Alabama, this is not true. We do, however, have a homestead exemption that can be applied, under certain circumstances, to protect the home from the claims of creditors. There are some states, Florida for example, that do provide a complete exemption
for a residential home. However, even in those states, the residential home is still listed as an asset in the bankruptcy schedules and claimed exempt.

Most people are not eligible for Bankruptcy anymore because of the Means Test

This is 100% false and creditors love to spread this one. On October 17, 2005, Congress signed into law new Bankruptcy legislation that required you to fill a form out called the Means Test. The Means Test only decides which Chapter of Bankruptcy you are qualified to file, but not whether you can file or not. Anyone can file Bankruptcy. You might have to file a Chapter 13 instead of a Chapter 7, but you can still file Bankruptcy.

Call 1-877-ONE-DEBT and talk to a lawyer about how bankruptcy works.

Do not believe the myths. Bankruptcy has been a part of our American laws throughout our history. The bankruptcy laws were designed to help people get a fresh start, not punish them. You initial consultation with an attorney at Bond & Botes is FREE.