Top 15 Myths about Bankruptcy
Myth #15: Bankruptcy relief is no longer available.
FALSE. Almost all of the relief formerly available through bankruptcy survives in today's bankruptcy code. It is more involved and somewhat more expensive, but it still works to get those buried in debt a fresh start.
Myth #14: You can't file bankruptcy if you have a job.
The new "means test" is supposed to divert some filers who make more than the median income for households of their size in their state of residence to Chapter 13. The only way to fund a Chapter 13 plan is to HAVE a job. So, this is completely untrue.
Myth #13: Medical bills can't be discharged in bankruptcy.
FALSE. A variation on this myth is that "you can't discharge credit card debt in bankruptcy." This has the sound of the law-as-described-by-bill-collectors. Almost all unsecured contract debt, like credit cards, personal loans, and medical bills, remain dischargeable in bankruptcy.
Myth #12: You Can't Get Rid of Back Taxes In Bankruptcy
FALSE. Certain federal, state and local taxes, inheritance taxes, and personal property taxes as well as overly burdensome interest and/or penalties can be mitigated under the bankruptcy laws. There are several qualifications that have to be met, but once these are met, relief is available.
Myth #11: If You're Married, Both You and Your Spouse Have to File for Bankruptcy
FALSE. In cases where both husband and wife have a lot of debt, it makes sense and saves money for both to file, but it is never a requirement. In fact, many cases, only one spouse files, and if you don't have any joint debt, your filing will have no direct impact on your spouse's credit.
Myth #10: There is a Minimum Amount of Debt Required to File Bankruptcy
FALSE. There is no minimum amount of debt—all that is required is that you are unable to pay your debts with your current income.
Myth #9: It's Really Hard to File for Bankruptcy
FALSE. In the hands of an experienced bankruptcy attorney, a bankruptcy case generally goes very smoothly. We handle all the technical details, leaving you free to concentrate on your family and loved ones, and on rebuilding your financial future.
Myth #8: Financially Distressed Individuals Can't Afford to Hire an Attorney
FALSE. In a Chapter 13 case, a pool of money is set aside to pay your creditors based on how much you can afford to pay over the life of the plan. That amount is paid out whether or not you have an attorney. If you do have an attorney, the attorneys fees are paid out of this pool in lieu of paying more to unsecured creditors. In other words, there is absolutely no cost difference to you to hire or not hire an attorney, so you might as well get expert representation.
In the case of a Chapter 7 liquidation proceeding, where legal fees and costs must be paid up front, a debtor can simply stop making their credit card payments for a period of time, setting aside these funds to pay legal and court costs.
Myth #7: Everyone Will Know You Have Filed for Bankruptcy
FALSE. Unless you're a celebrity or a major corporation and the filing is picked up by the media, it is likely that the only people who will know about a filing are your creditors and the people who you tell. While it's true that your bankruptcy is a matter of public record, so many people have filed—about 2 million during one year alone—unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed.
Myth #6: You Lose Everything You Own In Bankruptcy.
FALSE. In most bankruptcy cases filed by individuals, the debtor is able to keep almost everything he owns. That's because exemptions provide for assets that the debtor can keep and some assets, like pensions, are beyond the reach of bankruptcy trustees and creditors. Furthermore, a chapter 13 reorganization is specifically designed to enable you to keep your assets while paying as much debt as you can reasonably afford.
Myth #5: Bankruptcy represents personal or moral failure
FALSE: More than 90% of bankruptcy filings are traceable to job loss; illness; or divorce, factors largely out of anyone's control. Bankruptcy is a safety value to prevent individuals from being buried by debts they can never repay.
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.
A recent study by Professor Elizabeth Warren of Harvard Law School found that over half of all bankruptcies are related to illness, and 75% of those people who end up filing because of medical bills have health insurance.
People want to pay their debts. They want to be able to know that they've done "the right thing" by repaying everyone. But the fact is that credit card companies, collection agencies, mortgage companies and other bill collectors make it difficult to pay debts, and just about impossible to catch up once you've fallen behind. That's why the bankruptcy laws exist—to help honest people get a fresh financial start.
Moreover, far from being "immoral," the modern bankruptcy laws are morally and ethically based on sound biblical principals which demand the routine cancellation of excessive debt -- indeed, the bible places most of the responsibility for excessive debt on creditors who take advantage of debtors with outrageous interest rates and predatory terms. It is the financial enslavement of one's brother with excessive debt and interest for personal gain, not release of debts in bankruptcy, that is condemned by the Bible.
Myth #4: Bankruptcy costs our society too much
FALSE AND TO THE CONTRARY! Credit card issuers are wildly profitable despite the small percentage of loans discharged in bankruptcy. Furthermore, the bankruptcy laws serve an essential safeguard in a society to prevent the unhealthy building up of bad debt.
Modern American bankruptcy laws are rooted in longstanding biblical principles that debts should be routinely cancelled for the well being of both individuals fallen on hard times and society as a whole. Indeed, the biblical law required that all debts be "cancelled" every seventh year. See Leviticus Chapter 15.
A moral and healthy society would do well to follow this model. Indeed, Dr. Donald Morgan, PhD, a Senior Economist with the US Federal Reserve Bank of New York, has recently completed a study in which he contends that the 2005 restriction of bankruptcy relief bottled up this safety valve and in so doing, piled up excessive debt, helping to cause the financial meltdown we are experiencing today. See "Seismic Effects of the Bankruptcy Reform."
Myth #3: You Will Never Get Credit Again
Nonsense. People in Chapter 13 can borrow money during the case; people who've filed Chapter 7 get inundated with offers for new credit cards and car loans after they get their discharge. This is not credit at the best rates, but credit is available.
Filing bankruptcy gets rid of debt, which puts you in a position to handle more credit, and this makes you look more attractive to would-be lenders. At first, lenders will want more money down and will want to charge you higher interest rates. However, over time, if you are careful, and keep your job, and start saving money, and pay your bills, and do things that will put good marks on your credit report, your credit scores will get higher, and the terms you can get will improve. Many clients can qualify for mortgages, at regular rates, two years after their discharge.
Myth #2: Filing Bankruptcy Will Hurt Your Credit for 10 Years
FALSE. Bankruptcy is reported on your credit report for up to 10 years (Chapter 13 will sometimes drop off after seven years), but that does not mean it will have a negative effect on your credit standing. In fact, most people's credit score improves after they file Chapter 7 or Chapter 13.
Here's why. By the time most people make an appointment to see a bankruptcy attorney, their credit is usually trashed, messed up and maxed out. This being the case, you have no credit for bankruptcy to hurt. There's nowhere to go but up, and filing bankruptcy can help eliminate the balances, stop the continuing negative reporting, and put you in a position to restore your good credit.
Myth #1: You Will Never Be Able to Own Anything Again
FALSE. There is absolutely no restriction on future ownership. In fact, to the contrary, many VERY wealthy individuals made their fortunes AFTER bankruptcy. Donald Trump and Walt Disney are two notable examples. For many many other examples of what some very famous people did after they filed for bankruptcy (and, yes, they owned a whole lot of things afterwards), look at the list of Famous People Who Filed Bankruptcy.