Email this page to a friendBankruptcy Myths
Myths perpetuated in pop culture continues to circulate about bankruptcy and how it affects consumers.
Here are some of the more common bankruptcy myths along with the facts that we hope will help clear up some of these misperceptions.
Myth 1: Everyone will know you have filed for bankruptcy
Myth 2: You will lose everything you have
Myth 3: You will never be able to own anything again
Myth 4: You will never get credit again
Myth 5: Filing bankruptcy will hurt your credit for 10 years
Myth 6: If you're married, both you and your spouse have to file for bankruptcy
Myth 7: It's really hard to file for bankruptcy
Myth 8: Only deadbeats file for bankruptcy
Myth 9: Filing bankruptcy means you're a bad person
Myth 10: You can only file once for bankruptcy protection
Myth 11: Even if you file for bankruptcy, creditors will still harass you and your family
Myth 12: There is a minimum amount of debt required to file for bankruptcy
Myth 13: You can't get rid of back taxes in bankruptcy
Myth 1: Everyone will know you have filed for bankruptcy
Bankruptcy filings are of public record and so technically, anyone could find out about your case filing. However, the number of case filings each month is so huge, it is highly unlikely that anyone would find out.
Put another way, when is the last time you sought out bankruptcy case filings in your neigbhorhood?
Celebrities and publicly traded companies are of course the exception. Their filing is news, picked up by the media. Chances are, nobody will know.
Myth 2: Everything you own will be taken away from you.
Bankruptcy laws vary from state to state, however, every state has laws that protect you known as "exemptions." Exemptions may protect such things as your home, family heirlooms, retirement savings and your car just to give you a few ideas.
In situations where you have more equity in your property than can be protected by bankruptcy exemptions, there is a form of bankruptcy known as a Chapter 13 repayment plan where you pay your creditors a negotiated percentage of what you owe over a period of time, typically from 3 to 5 years.
Filing bankruptcy does not generally wipe out liens. Therefore, if you want to keep a car, truck, home or business equipment that is collateral for a loan, you need to keep your payments current. If the payments are current and there's no equity (or you can exempt the equity), you can should be able to keep these items.
Myth 3: You will never be able to own anything again
Upon completing your bankruptcy filing, you can purchase and possess whatever you want and can afford. It's known that many post bankruptcy people have received pre-approved car loans and credit cards as soon as they receive their discharge, and many of my Chapter 13 clients with homes are able to refinance while in their bankruptcy. This is not a guarantee, but it happens often. Assuming they don't run into new credit problems after their bankruptcy, many people are are able to qualify for a regular FHA mortgage at regular interest rates a couple years after their discharge.
Myth 4: You will never get credit again.
Quite the contrary. Filing bankruptcy gets rid of debt, Getting rid of debt puts you in a position to handle more credit, and this makes you look more attractive to would-be lenders. Many people who have received a discharge on their bankruptcy find themselves receiving offers for new credit cards, car loans, etc. Many people have been able to refinance their homes in a short time after their discharge.
It's not always a good thing, however. The offers for credit cards, car loans, and other credit comes at a higher price. Lenders know that once someone has filed for bankruptcy that they have a clean slate, but that they also are not going to be able to file for bankruptcy again for several years. If you aren't careful, you can wind up in the same position. It's important that you use credit wisely once you have a fresh start. Staying within your means, paying your bills on time, and saving your money are all things that will help you re-establish a strong financial future.
Myth 5: Filing bankruptcy will hurt your credit for 10 years
Not true. Two different concepts are being confused with each other. The fact that bankruptcy is reported on your credit report for 10 years is getting mixed up with the effect that reporting will have on your credit. Just because something is reported on your credit report doesn't necessarily mean it will have a negative effect on your credit standing. In fact, most people's credit scores improve after filing.
The fact that you need to make an appointment to see a bankruptcy attorney, chances are your credit is most likely already in the trash, messed up, maxed out... With a bad credit report, you really have no credit for bankruptcy to hurt.
Furthermore, in our experience, if you haven't re-established good credit in 2 to 4 years after you file bankruptcy, it most likely has nothing to do with your bankruptcy filing... and it certainly has absolutely nothing to do with the fact that your credit history still shows and old bankruptcy.
Myth 6: If you're married, both you and your spouse have to file for bankruptcy
Not true. In cases where both husband and wife have a lot of debt, it makes sense and saves money for them to both file, but it is never a requirement under the law. In fact, some of the cases we file where our client is married, only one spouse files. Further, if you don't have any joint debt, your filing will have no impact on your spouse's credit. However, if both spouses are going to file, it makes sense to do it together as they can both file for the price of one filing fee.
Myth 7: It's really hard to file for bankruptcy
No, it's not, at least not with the help of an experienced bankruptcy attorney. Although you may file bankruptcy without the help of an attorney, an experienced attorney will assist you in filing the proper papers and help you keep as many of your assets as possible, while at the same time helping you to avoid any possible charges of fraud.
The decision to file may be hard, but once the decision is made, the filing part is easy.
Myth 8: Only deadbeats file for bankruptcy
Not true. The vast, overwhelming majority of the people who file bankruptcy are good, honest, hard-working people, just like you and me, who file as a last resort. They have spent months or years struggling to pay the bills left over from some life-changing experience, such as a serious illness, the loss of a job, separation or divorce, a failed business venture, or some family emergency...or because they honestly and mistakenly fell into debt at a young age before they knew better, before they knew anything about budgeting or how to manage money.
Many bankruptcy filings are often because of an illness, expected or not. A great many of those people even had health insurance and still found themselves with enormous debt. Many of our clients want to repay their debts... they just can't. And the credit card companies, collection agencies, mortgage companies and other bill collectors are willing to work with them so they can. Sound familiar?
Myth 9: Filing bankruptcy means you're a bad person
Not true. There's a reason over 1,000,000 Americans file for bankruptcy relief each year, and it's not because they're bad people. Lots of good, honest, hard-working people fall on hard times. Sometimes life can be brutal and the money just isn't there... it's a fact of life. Bankruptcy law were created with this in mind to make sure you have a way, if need be, to get free from the burden of debt so that you and your family can have a second chance at a "fresh start".
Far from being immoral, the origins of the modern bankruptcy code are in the Bible. Look at the "Sabbatical Year" and "Jubile Year" and forgiveness of debts found in Leviticus 22, Deuteronomy 15 and other sections of the Old and New Testaments. In fact, "Chapter 7" comes from the forgiveness of debts every 7 years found in the Sabbatical Years. In the Lord’s Prayer, the disciples are taught to ask God to “forgive us our debts, as we also have forgiven our debtors” (Matt. 6:12).
Myth 10:You can only file once for bankruptcy protection
The truth is, you can only file for a Chapter 7 bankruptcy once every 8 years. After 8 years, if need be, you can file a Chapter 7 again. As for filing a case under Chapter 13 of the Bankruptcy Code, there are no such restrictions. Hopefully, however, you will never need to file more than one bankruptcy.
Myth 11:Even if you file for bankruptcy, creditors will still harass you and your family
This is NOT true at all. Once you have filed bankruptcy, the Bankruptcy Court issues an order telling all of your creditors to leave you alone. No more phone calls... No more collection letters... No more lawsuits... No repossessions... No foreclosures... Nothing! This order has a name. It is called the "automatic stay", and it is issued pursuant to 11 United States Code, Section 362. The automatic stay prohibits your creditors from taking any collection actions against your or your assets. After you file bankruptcy, the creditor is not even allowed to talk to you. In addition, the creditor must stop any collection attempts already started. The
Myth 13:There is a minimum amount of debt required to file for bankruptcy
Not true. If you really wanted to, you could file even if you had a few hundred dollars in debt. but why? The court cost to file a chapter 7 would be comparable to the debt. To some people with higher incomes, a small amount isn't worth filing bankruptcy, however, for some people with little to no income at all, there is no choice. However, speaking to an experienced bankruptcy attorney who can help you decide is a good place to start.
Myth 13: You can't get rid of back taxes in bankruptcy
In some cases, we're able to get rid of back taxes. Most Federal, State, and Local income taxes more than 3 years old, inheritance taxes, and personal property taxes can all be discharged, Under the law, there are a couple of qualifications that have to be met first, but once they are met, these taxes are gone. There is a major exception for business owners.. filing bankruptcy does not get rid of withholding or sales taxes no matter how old they are.
Conclusion
The new structure was thought up by the government as a way to help force people to pay their way out of debt; unfortunately it may have the opposite effect of actually forcing people into bankruptcy.
Read the next bankruptcy article
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