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Busting Bankruptcy Myths – Bankruptcy Lawyers

There are many misconceptions when it comes to filing for bankruptcy. Myths circulate many legal procedures primarily due to unfamiliarity with complex laws and circulating stories of individuals who suffered an unexpected large due to poor legal advice by their bankruptcy attorney. In reality, filing for bankruptcy does not have as many negative legal consequences as many naysayers would have the public believe. Currently, it is estimated that somewhere between 1.21 to 1.25 million Americans will file bankruptcy this year and that the average filings for bankruptcy in the previous year were 0.13 million higher. In an attempt to bust the common bankruptcy myths that cause much unneeded worry and stress, we will address the most common myths and explain why they simply are not true.

1) Financial Irresponsibility

The most common bankruptcy myth by far is that the individual filing for bankruptcy is financially irresponsible and has intentionally spent money beyond their financial means. In some very rare situations, it may be true that an individual intentionally ran up credit cards and took out loans with the knowledge that they would later fraudulently try to discharge the debt(s) on a bankruptcy. However, the vast majority of the time it is necessary that an individual file for bankruptcy on the basis of more legitimate reasons that were financially unforeseeable. Also, the court recognizes that the vast majority of people filing bankruptcy are just “honest but unfortunate debtor(s).” (See: ROBERT LOUIS MARRAMA, PETITIONER v. CITIZENS BANK OF MASSACHUSETTS et al.) The court recognizes that most circumstances that make it necessary for individuals to file for bankruptcy are also quite common, and they include sudden termination of employment, extreme business loss, divorce, and serious illness.

2) Bankruptcy will Discharge All Debt

Many people wrongfully believe that filing for bankruptcy will eliminate all of their past debts entirely. This is a misconception that is far from true and held by many people that are seeking bankruptcy as a financial fresh start. However, there are several instances in which debts cannot be discharged in any bankruptcy proceeding. The following are a list of debts that will not be discharged in any form of bankruptcy: child support obligations, alimony obligations, crime restitution obligations, some forms of student loans, and recent tax debts.

3) All Credit Usage / Borrowing Before a Bankruptcy Will Always Be Included in the Discharge

You cannot simply charge up all of your credit cards and incur other debts and believe that the debts will be discharged in your bankruptcy proceeding. Charges that are significant in amount for non-essential items shortly before the filing bankruptcy (usually about 90 days) may not be discharged. “Federal courts have ruled that frivolous charges prior to a bankruptcy can be considered fraud and will therefore not be dischargeable debts.” The trustee and other creditors involved in your case will closely scrutinize all transfers of money, charges, and spending for months or even years prior to the filing for bankruptcy. If they believe that any of the monetary exchanges or applications of credit were during a period in which the debtor knew that a filing for bankruptcy is very probable, then the debts may not be included in the bankruptcy discharge. While this is a very infrequent issue in most of our bankruptcy cases, it is possibility that needs to be considered before filing a case.

4) Bankruptcy will Permanently Damage your Credit

It is often misconceived that filing for bankruptcy will ruin an individual’s credit for forever. This is false and most individuals can begin rebuilding their credit rating as soon as the bankruptcy is finalized. Most individuals are actually surprised at the rate in which their credit can be fully restored following a bankruptcy or at the fact that they are able to acquire credit through secure programs almost immediately. Obtaining and taking advantage of credit after your bankruptcy may actually assist you on rebuilding your credit. Most banks and monetary institutions will offer low limit credit cards or secure credit cards, which require pre-payment, and are available within months following a bankruptcy. However, any credit lines acquired and not adequately paid on time will negatively impact your credit score and only further damage your ability to improve your credit score in the future. It is advisable after any bankruptcy to make a habit out of checking your credit score regularly two (2) times per year or more.

5) Bankruptcy Will Fix All Of My Financial Problems

Some people falsely believe that filing for bankruptcy will be a cure all to remedy all of their financial problems. However, the purpose for bankruptcy is to use legal remedies to make debts more easily manageable. For example, the filing of a Chapter 13 bankruptcy, will reorganize the debts and possibly reduce them to make the repayment easier for the debtor, but the debt is not entirely eliminated. Although relatively rare, the filing of a Chapter 7 bankruptcy may still involve the repayment of debts if the filer has very significant assets that cannot be protected with the applicable bankruptcy asset exemptions. While the filing for bankruptcy is a relatively inexpensive process, it generally requires the hiring of an attorney and the paying of some fees. The bankruptcy process will also require the filer to take a credit counseling course (online, on the phone, or in person) and attend a meeting with a bankruptcy trustee. While most people consider this to be a small inconvenience, if you travel a lot for work or find it hard to get time off from your job, this may be costly and disruptive to your work schedule and daily life.

6) Everyone Will Know About My Bankruptcy

Another common misconception is that individuals believe they will be judged on the basis of their bankruptcy or that everyone will know they filed, and they will be stigmatized afterward. However, your filing for bankruptcy is generally on a “need to know basis.” You are still very much in control of which individuals may know about your filing for bankruptcy. Although, your bankruptcy is a matter of public record, it is highly unlikely everyone will know about the filing unless you are of notoriety, a prominent person, a celebrity, a politician, or a major corporation that is of the public’s interest and is commonly reported on in the news. Most information pertaining to a bankruptcy filing will only be located in legal documents and will only be able to be viewed if an individual is intentionally searching for the bankruptcy in question and has special access to court records. In some very rare and prominent high asset cases, the local newspaper may print a list of individuals filing for bankruptcy within the community to insure that any local debts are accounted for prior to the discharge of all debts and to give all possible creditors a chance to collect their debts.

7) My Employer Will Find Out About My Bankruptcy

Most people fear that they will be fired from their current employer if their employer finds out about their bankruptcy. However under federal discrimination law, “no employer — government or private — may fire you because you filed for bankruptcy. Nor may an employer discriminate against you in other terms and conditions of employment, by reducing your salary, demoting you, or taking away responsibilities because of your bankruptcy.” An employer must terminate your position on the basis of work related duties, and in the instance that you are fired immediately following your employer’s discovery of your bankruptcy, you may have a legal case on the basis of discrimination. Current employers generally only figure out about a bankruptcy only if an income deduction order is implemented. If your bankruptcy is discovered by your employer, it still may affect particular security clearances and job responsibilities with the handling of job finances. In terms of future employment within the private sector, a private employer may conduct a credit check prior to your official employment. A credit check will reveal a bankruptcy and may impact that employer’s decision to hire an employee, especially if the person is being hired for a payroll position, book keeping, or accounting. For your employer to run a credit check you must give them permission for the credit check and denying the employer the ability to run a credit check may result in you not being hired by the public employer. It is better to be open and honest about your credit history when it is brought up by the prospective employer than to conceal it. However, it has been our experience that so many people from all walks of life have filed bankruptcy, most employers cannot afford to not to hire people that have previously filed bankruptcy and do not include it in their decisions regarding hiring.

8) I Will Lose My Car and House

One myth is that you will lose important assets by filing for bankruptcy (such as a house or car) and that you could end up living out of a cardboard box and walking to work after the creditors take every last item and every cent you have left. This is clearly a myth; under federal law, generous bankruptcy exemptions allow for a large majority of usable property to be retained. And the applicable state laws that are in place also intentionally protect certain assets up to a certain value; such as, homes, household items, clothing, cars, and qualified retirement plans. In vast majority of bankruptcy cases filed, individuals will be able to retain all of their personal items, home, car, retirement savings and other important assets. Also, most people that file bankruptcy will be able to retain any property they have a loan for (automobiles, furniture, homes) so long as they can afford to make the regular monthly payments. It is actually quite rare for any of our clients to lose any assets in a bankruptcy case.

9) I’m Married So My Spouse Will Also Have to File For Bankruptcy-

It is not necessarily true that both spouses will need to file for bankruptcy if you are married. In most cases the primary extent of debt is in one name and therefore it will only be advisable to file for the name holder of the debt to file for bankruptcy. In cases where the debt is held in the name of both spouses the spouses may file a joint claim for bankruptcy together— otherwise the creditor may demand full payment from the other non-filing spouse. As long as you don’t have any joint debt your filing will have no direct impact on your spouse’s credit.

10) Bankruptcy Relief Is No Longer Available-

Bankruptcy relief is still available through bankruptcy law and is still existent in each states legal bankruptcy code. You will need to consult an attorney as to which reliefs are possible in your individual case—which may cost you. However, seeking relief often outweighs the cost of attorney’s fees for individuals that are trying to eliminate their debt as much as possible with their bankruptcy.

11) I Can’t File For Bankruptcy I Have a Job-

You may still file for bankruptcy if you have a job. In most cases it will be necessary for you to be employed in order to pay off your bankruptcy debts and to maintain your properties on mortgage or loans. While some of the new “means tests” within Chapter 13 bankruptcy are divertive and base the ability to file on the basis of median income—preventing those with over median income from filing they do not make it necessary to be unemployed. In fact the only way to fund a Chapter 13 bankruptcy plan is to be employed. If it is perceived that your income may effect a certain filing of bankruptcy other bankruptcy chapters are available to account for your employment and income.

12) Medical Bills Cannot be Discharged in Bankruptcy-

All unsecured contract debts such as credit cards, personal loans, and medical bills can be dischargeable in bankruptcy.

13) Taxes are Non Dischargeable in Bankruptcy-

Taxes can be mitigated in bankruptcy and can therefore be dischargeable. However, there are still qualifications to which taxes may be discharged or receive relief, but once qualifications are met then the debt or portions of the debt may be discharged. Some tax related debts that can be discharged are: Some federal, state, and local taxes, inheritance taxes, and personal property taxes. Furthermore taxes due without the filing of a tax return are not dischargeable- which may account for the origin of non-dischargeable taxes as a myth.

14) You Must Have a Lot of Debt to File for Bankruptcy-

There is no minimum requirement to meet to file for bankruptcy. The only requirement for filing for bankruptcy is that there is 1) a debt, 2) you are unable to pay the debt, 3) your inability to pay the debt is based on your current income.

15) Filing for Bankruptcy is Hard-

Whenever you are considering filing for bankruptcy you should always consult with an attorney with bankruptcy experience. In most cases bankruptcy proceedings are non-complex legal proceedings. However, if you are inexperienced and cannot find all of the details within the bankruptcy and are unfamiliar with bankruptcy code then the proceedings may be very difficult. Therefore filing your bankruptcy case with an attorney makes your case much easier as the technical financial details are left to those with experience.

16) I’m So Bankrupt I Cannot Afford an Attorney-

In a Chapter 13 bankruptcy case money is specifically set aside to account for payments owed to creditors within your bankruptcy plan. The money set aside within the plan is still paid out to the creditors regardless of whether or not an attorney is retained. In the event that the debtor does retain council the money pooled within the plan is used to pay the attorney’s fees instead of paying more money off to the other unsecure creditors. Therefore if there is no difference in cost for legal representation then you might as well hire an attorney to mitigate your other debts. Chapter 7 allows for liquidation processes to take place to cover all creditor debts including legal fees. However, in a chapter 7 bankruptcy these fees will be required upfront. Chapter 7 bankruptcies allow for other unsecure debts to go unpaid for short amounts of time to ensure that the debtor may prepay for legal and other court related bankruptcy costs.

17) Bankruptcy Will Damage My Credit for 10 years-

Bankruptcy will appear on your credit report for up to 10 years, but it does not mean that it will damage your credit for 10 years. In some cases a bankruptcy will also be removed from a bankruptcy report in a shorter amount of time—for example a chapter 13 bankruptcy can be dropped off a credit report in a soon as 7 years. Even if the bankruptcy stays on the credit report it does not mean that it will negatively affect your credit score. In most cases you may begin rebuilding your credit within months of your bankruptcy discharge and therefore you can begin rebuilding your credit score as soon as you are able to obtain forms of secure credit. In fact a bankruptcy attorney can prevent negative reporting on your credit score during the bankruptcy which puts you in a better position following your bankruptcy to improve your credit.

18) I Will Never Be Able to Own Anything After Bankruptcy-

Filing for bankruptcy should in no way restrict your ability to own anything in the future. In fact some wealthy entrepreneurs have recovered from bankruptcy and amassed great fortunes; such as, Donald Trump and Walt Disney. Once you are able to rebuild your credit to a point where you can obtain unsecure debt you will be able to make many purchases and take possession over such items.

Content Revised: 2016-01-18

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