13 Bankruptcy Myths

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Everybody will find out about my bankruptcy

Bankruptcy is a public legal proceeding but unless your case is discovered by the media because you are a famous person or large corporation, chances are that the only people who will know about a filing are your creditors. The number of people and companies that file cases is so large that very few publications have the space, manpower, or inclination to run all of them.

Every single debt gets wiped out in Chapter 7 Bankruptcy

Sounds great but its not always true. The law specifies that certain types of debt cannot be discharged. Notable examples include child support, alimony, student loans, certain fines and taxes, debts that result from fraud, and intentional torts.

I’ll lose everything that I own

This myth is one of the main reasons people who really should file for bankruptcy don’t do it. You may think bankruptcy involves selling everything you have and starting over with nothing. The law specifies you have exemptions for most of your personal property including retirement accounts like pensions and IRA’s are protected.
However if you own valuable assets which exceed any allowable exemption, then you would not file a Chapter 7 but instead a Chapter 13, which does not require you to liquidate in bankruptcy.

I’ll lose my credit after bankruptcy

Have no fear, it won’t be long before the companies start sending credit card offers again. There are countless companies happy to provide credit to you. Also, if you have a card that has zero balance when we file your bankruptcy, we don’t have to list it as a creditor since you don’t owe them any money. In some cases, you might be able to keep that card even after the bankruptcy.

Most clients ask me “if I file bankruptcy, will I ever be able to buy a house?” many times the answer is “If you don’t file for bankruptcy, you will never be able to get a house.” There aren’t many banks that will give you a mortgage loan with $35,000 of credit card debt.

If I’m married, we both have to file for bankruptcy

Not exactly. If only one of you has a significant amount of debt in their name then it makes sense to only discharge those creditors. However, if both of you are responsible for the debt then it may make more sense to file together because failing to do so would likely mean the creditor will simply demand payment for the entire amount from the spouse who didn’t file.

Only deadbeats and scammers file for bankruptcy

Most of our clients file for bankruptcy after a major life event, such as a divorce, losing their job and suffering illness or injury. They are hard working people that struggled to pay their bills for months and just keep falling further behind and they deserve a fresh start.

I don’t want to include certain creditors because it’s important to pay them back

The bankruptcy discharge permanently prevents your creditors from collecting against you. That means you are no longer obligated to repay them, but if your conscience won’t let you sleep because you didn’t pay back your debts, nothing in the bankruptcy law prevents you from doing so.

I can’t get rid of taxes through bankruptcy

Certain taxes, generally those more than 3 years old can be wiped out in Bankruptcy under certain conditions. Among other things the tax returns must have been filed two years before we file the bankruptcy and have been assessed over 240 days before we filed.

I can only file bankruptcy once

You can file for bankruptcy more than once, but the law has required waits between filings. You can only file a Chapter 7 bankruptcy once every eight years. You have to wait two years to re-file a Chapter 13 filing and four years between a Chapter 7 and a Chapter 13 case.

I can max out all my credit cards, file for bankruptcy and never pay for the things I bought. Acting that way, especially if done on purpose, is probably fraud and can result in the court denying your discharge. The trustee assigned to your case can review all of your purchases in the time leading up to your filing. The trustee knows what to look for.

Bankruptcy will damage my credit for 10 years.

Don’t confuse two totally different concepts : (1) The fact that bankruptcy gets reported on your credit report for 10 years vs. (2) The effect that reporting may have on your credit.
All of the items on your credit report affect your score but the negative impact on your credit standing is less as time goes by. Better credit scores suffer the most immediate damage but if your credit is already messed up or maxed out there isn’t much credit for bankruptcy to hurt. Most of our clients are able to re-establish their credit within 1 to 2 years after we file, with many being able to purchase a home in as little as 2-3 years after bankruptcy.

If I file it will hurt my credit.

Well…that depends. By the time you are considering a bankruptcy attorney most credit is already in pretty bad shape. Our clients are surprised to find that bankruptcy can actually help rebuild credit. Most are surprised at the number of credit offers after we file their case. Bankruptcy gets rid your debt which is a critical first step in re-building credit. The truth is that the algorithms used to generate a credit score are trade secrets but bankruptcy will have an effect. In some cases, when you file bankruptcy it actually raises the score immediately.

Even if I file bankruptcy my creditors will still harass me.

The moment we file your bankruptcy, a Judge from the Bankruptcy Court signs an order telling all your creditors to leave you alone. That means no more phone calls or collection letters. It immediately stops most lawsuits, repossessions and foreclosures. It is called the “automatic stay” and prohibits any and all collections actions. That means when we file your bankruptcy, creditors are not even allowed to talk to you. Also, your creditors must stop any collection attempts they already started.
If a creditor violates the automatic stay, you have the right to bring them into Court for Contempt of Court, and the Court may Order that you be compensated. Bankruptcy Court Judges do not take violations of the automatic stay lightly. Judges can punish creditors severely if they ignore the automatic stay. Basically creditors have to leave you alone or they can suffer consequences.