16 Myths About Bankruptcy

1. Everyone will know I've filed for bankruptcy

Unless you are a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While its true that bankruptcy is a public legal proceeding, the number of people filing is so massive that very few publications have the space, manpower, or inclination to run all of them.

2. All debts are wiped out in Chapter 7 Bankruptcy

You wish. Certain types of debt cannot be discharged (erased). They include child support, alimony, government-issued or government-guaranteed student loans, certain fines and taxes, debts incurred as a result of fraud, and intentional torts.

3. I'll lose everything I have

This is the misconception that keeps people who really should file for bankruptcy from doing it. People think the government will sell everything they have and they'll have to start over in a cardboard box. You have what are called exemptions for most of your property. Pensions as well as IRA's are protected. If you do however have valuable assets which are valued over your exemption, you would not file a Chapter 7 but instead a Chapter 13, which is a non- liquidating bankruptcy.

4. I'll never get credit again

Quite the contrary. It won't be long before you're getting credit card offers again. There are innumerable companies that will provide credit to you. "I don't advise any of my clients to run out and run up the bills again, but if someone needs an automobile, they can go and will be able to credit. You don't have to go underground or something to get money.

Also, if you have a credit card with a zero balance on the day you file for bankruptcy, you don't have to list it as a creditor since you don't owe any money on it. That means, 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?" I always answer that question with "If you don't file for bankruptcy, you will never be able to get a house." What lender would give you a mortgage loan with $50,000 of credit card debt? FHA and VA guaranteed mortgage loans are given to individuals one year after receiving their discharges.

A recent study conducted by Kathryn Porter an Associate Professor of Law at the University of Iowa, found that consumers who have erased their debt through Chapter 7 bankruptcy received more credit offers than those debtors who repaid their debts after filing Chapter 13. the study further found that nearly 100% of more than 300 families surveyed had been offered new credit cards with a year after completing a chapter 7 Bankruptcy.

5. If you're married, both spouses have to file for bankruptcy

Not necessarily. "It's not uncommon for one spouse to have a significant amount of debt in their name only.". However, if spouses have debts they want to discharge that they're both liable, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn't file.

6. Only deadbeats file for bankruptcy

Most people file for bankruptcy after a life-altering experience, such as a divorce, a loss of employment, or a serious illness. They've struggled to pay their bills for months and just keep falling further behind. It is nothing to be ashamed of. Over 2 million people filed bankruptcy in 2005. In fact, the concept of bankruptcy comes from the bible: In the Old Testament Deuteronomy Chapter 15 it states, "At the end of every seven years...every creditor shall release that which he hath lent unto his neighbor; he shall not exact it of his neighbor and his brother; because the Lord's release hath been proclaimed."

7. I don't want to include certain creditors in my filing because its important to me to pay them back someday and if the debt in discharged, I can't ever repay them.

Bless you for even thinking about such a thing. You're no longer obligated to repay them, but you always have that opportunity. If your conscience won't let you sleep at night because you didn't pay your debts, there is nothing in the bankruptcy code that prevents you from doing that once you're back on your feet.

8. You can't get rid of back taxes through bankruptcy.

Not true. The taxes owed must be more than 3 years old, the returns must be filed more than two years before you file the bankruptcy and the tax had to be assessed more than 240 days before you filed.

9. You can only file for bankruptcy once.

You can file for bankruptcy more than once, but the bankruptcy law that went into effect in October 2005 lengthened the required wait 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.

10. I can max out all my credit cards, file for bankruptcy and never pay for the things I bought.

That's called fraud and can result in a denial of your discharge. The trustee in your case will review all your purchases right before your filing. The trustee knows what to look for.

11. Banks have lost a lot of money due to bankruptcy filings.

Bank profits from credit cards are at an all time high, over $30 billion a year. If banks were truly suffering from bankruptcy losses, they would start exercising prudence in lending instead of giving our credit cards like candy. Those profits would not be given back to other credit card users anyway, the banks would keep them.

12. Bankruptcy "costs" each family an average of $400 a year.

This figure assumes that debtors could pay their bills if they did not file bankruptcy. Banks know that debtors who need to file bankruptcy do not have the ability to repay. Even if they did not file bankruptcy, they would not be able to pay their debts in full.

13. Filing bankruptcy will hurt your credit for 10 years:

Not true. You are getting 2 completely different concepts confused with each other. You are getting the fact that bankruptcy is reported on your credit report for 10 years mixed up with the effect that reporting will have on your credit. Just because something is reported on your credit report does NOT necessarily mean it will have a negative effect on your credit standing.

First lets get one thing out in the open. By the time you need to make an appointment to see a bankruptcy attorney your credit is already messed up or maxed out or both. This being the case you have no credit for bankruptcy to hurt.

Furthermore, in my experience if you have not re-established good credit in 1 to 2 years after you file bankruptcy most likely it has nothing to do with the fact that you once upon a time filed bankruptcy. It certainly has absolutely nothing to do with the fact that your credit history still shows an old bankruptcy.

14. Filing bankruptcy will hurt your credit:

Sorry, wrong again. Think about it. By the time you come to a bankruptcy attorney....your credit is already either messed up or maxed out. And if it's already messed up or maxed out....how can bankruptcy hurt it?

The big surprise for my clients is when I tell them that filing bankruptcy can actually help them re-build their credit. Bankruptcy gets rid of debt....and getting rid of debt puts you in a better position to handle new credit....if only someone will give it to you. Therefore....bankruptcy is the first step in the process of re-building your credit.

The truth of the matter is that bankruptcy has very little to do with the algorithms that affect your credit score. In some cases, filing bankruptcy actually raises your credit score right away!

15. Even if I file, creditors will still harass me and my family:

This is NOT true. In fact, nothing could be further from the truth. The minute you file 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 any and all collections actions. 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 automatic stay is very powerful, and puts the full weight of the United States Courts to work for you, to make sure your creditors leave you alone. If a creditor violates the automatic stay, you have the right to bring the creditor before the Court for Contempt of Court, and to be compensated accordingly. Believe me, Bankruptcy Court Judges do not take kindly to creditors who ignore the automatic stay, and these Judges have been known to punish creditors severely. Very simply, once you file for bankruptcy, creditors must leave you alone or suffer the consequences.

16. If I file, it will add to the burden I am already facing in my marriage and might result in divorce:

This is NOT true. Usually, it works just the opposite. Filing bankruptcy is not the problem. The problem is not being able to pay your bills. All good, honest, hard-working people feel a strong need to pay their bills, and not being able to do so causes them to feel tremendous stress. Unless you do something to relieve this stress, the stress can quickly build to the breaking point....the marriage breaking point. Bankruptcy is designed to get you out from under the burden of debt, to protect your property and to lower your stress level. If your experience is like that of other couples, you will find that filing bankruptcy... and lowering the stress level.... can be a crucial first step in bringing the love and caring back into your relationship which in turn gives your marriage a fighting chance. The number one reason for divorce in the United States is money troubles. Imagine if you had no more money troubles!