Bankruptcy Myths and Misconceptions

ANSWER: NOT TRUE. Decades ago, there was a stigma associated with filing for Chapter 7 or Chapter 13 Bankruptcy. The stigma of filing is long gone and it is likely that you have friends or family that have filed for Bankruptcy. While Bankruptcy is usually a last resort, almost every single one of my former clients told me that they were glad they filed and wished they did so sooner. Many clients asked me after the trustee’s hearing “that was it?” and couldn’t believe how easy it was to get a fresh financial start. The three major causes of needing to file for bankruptcy are job loss, divorce or illness, and is not usually a result of reckless spending. Many individuals have either lost their jobs due to the Covid-19 pandemic and cannot pay their bills. Certainly events beyond your control do not equate to being a failure. The Bankruptcy laws are there for a reason – to assist people get out from under debt that could take decades to repay and to start over.

ANSWER: NOT TRUE. While it is true that filing for Bankruptcy will remain on your credit report for 10 years, that does not mean that you cannot get credit back after Bankruptcy. In fact, if your credit is poor when you file, you will likely get a small bump up in your credit rating the day you file the Bankruptcy with the court. As soon as your debt is discharged (wiped out) you will get offers for small lines of credit. If you pay your bills on time, especially mortgages and car loans, there is no reason why you should not be able to establish credit relatively quickly. In fact, a 2014 report from the Federal Reserve Bank found that individuals who filed for Chapter 7 Bankruptcy saw their scores improve from an average of 538 to an average of 620 by the time their case was over in approximately 6 months. While it is true that not every lender will extend credit, and you will likely pay a higher interest rate initially, you will get credit. The best advice that I give to my clients is to create a budget, live within their means and pay their bills on time. If you do these 3 things, there is no reason why you cannot get credit after the bankruptcy case is discharged.

ANSWER: NOT TRUE. You are allowed to own property in a Bankruptcy and most property in a bankruptcy filing is “exempt”, meaning the person is allowed to retain it. Bankruptcy rules allow property to be owned up until a certain amount which means that debtors only rarely lose anything at all. Assets considered exempt vary from state to state, but your house, vehicles, bank accounts and clothes are generally safe. For example, for a married couple filing Bankruptcy, they are allowed to have approximately $50,000 in equity in their home under Bankruptcy rules. For those who own more property than is allowed, those individuals can file for a Chapter 13 repayment bankruptcy and still keep all of their property. However, if too many assets are owned and the debtor files a Chapter 7 Bankruptcy, the trustee can sell property that has a value greater than that is allowed, although this happens on very rare occasions. If you own property, call us and we would be happy to speak with you for free and guide you in the right direction.

ANSWER: NOT TRUE. You can still file for Bankruptcy even if you have a good income. The Court will look at your income for the 6 months before the date you filed for Bankruptcy and your lawyer will put your income through the “Means Test.” This test looks at your income and subtracts allowable deductions. If you “pass” the Means Test, then you would be eligible to file for Chapter 7 Bankruptcy in which your debts would be discharged without you having to pay any of your debt back. If you “fail” the Means test, meaning you make too much money, then you would have to do a Chapter 13 repayment Bankruptcy in which you would have to repay all or a portion of your debt over a 5 year period through the Bankruptcy court. If you are not sure if you make too much money to file for Chapter 7 Bankruptcy, give us a call for a FREE CONSULTATION and we can run your number through the Means Test to find out.

ANSWER: NOT TRUE. Bankruptcy law allows for a married filer to file individually or jointly. If you are married, you must decide if a joint filing is necessary, which depends on whether your spouse has debt they wish to be discharged. If a married couple has joint debts, like a mortgage, credit cards, car loan, etc, then filing jointly may be appropriate. However, if one spouse has good credit or if there are no joint debts, it may be smarter for the other spouse to file individually to eliminate his debts, while keeping the non-filing spouse’s credit intact.

ANSWER: NOT TRUE. An individual may file for bankruptcy more than once, depending on the date filed and the type of bankruptcy. For Chapter 7, you can receive a discharge once every 8 years, and in Chapter 13, you can receive a discharge every 2 years. If a previous case was dismissed (thrown out), there is usually no waiting period to file another case, although a judge can prohibit additional filings if a case was dismissed “with prejudice.” Our Firm has helped many clients with multiple filings and we possess the experience to guide you through the process.

ANSWER: NOT TRUE. If you go on a spending spree and max out your credit cards right before you file, this is a common example of bankruptcy fraud. If you are found to have committed fraud, then the debt incurred right before filing for Bankruptcy could be deemed nondischargeable which means you would still be responsible for the debt. Small expenses, such as cost of living expenses incurred prior to filing are typically not questioned.

ANSWER: NOT TRUE. The main reason most people file for bankruptcy is to get out from under their debt and get a fresh start. It is true that almost all unsecured debts can be discharged in a Chapter 7 bankruptcy such as personal loans, utility bills, credit card charges, medical bills, and repossession debt. However, not all debt can be discharged in bankruptcy. Child and spousal support, most student loan debt, and most taxes cannot be wiped out in a Chapter 7 Bankruptcy. If you have tax debt, you may be able to file a Chapter 13 repayment bankruptcy whereby you repay the tax debt over a 5 year period. Otherwise, these debts are not able to be discharged through Bankruptcy.

ANSWER: FALSE. Once you file for Bankruptcy you are under the protection of the Automatic Stay of Proceedings, which means that all collection activity must immediately cease. Creditors must cease. This means your creditors cannot file a lawsuit, proceed with a prior lawsuit, or try to collect on a prior legal judgment against you. In fact, all communication with you, including phone calls and/or letters, must immediately stop.

ANSWER: FALSE. While the Bankruptcy laws are extremely complex (the Bankruptcy laws are literally hundreds upon hundreds of pages” it is relatively easy to file. Because of the complexity, it is NOT recommended that you try to save a little money and try to represent yourself in Bankruptcy court. This is not to say that you cannot handle it yourself, but the laws are so complex and if you make an error, the court can potentially seize and sell your belongings. Hire an experienced Bankruptcy lawyer to represent you in court to ensure that things are done correctly and that you and your property are protected. Attorney fees are extremely reasonable in contrast to how complex the law is. The experienced attorneys at Ellis B. Klein & Associates have been representing clients in Bankruptcy court since 1999 in thousands of cases. Call us today at (800) 536-0501 for a FREE Consultation and I would be happy to discuss your situation with you at no charge to guide you in the right direction.