Millions of Americans have been misled about the reality of bankruptcy. The overwhelming advertising and lobbying of the banking and credit card companies are relentlessly hammering us into believing that only deadbeats file for bankruptcy and it will ruin your credit forever.
This is entirely false.
The truth is that the bankruptcy process was created because bad things happen to good people. These myths are deliberately created to frighten and discourage you so that you will not take the steps you need to get a fresh start.
Here are some of the most common myths and the truth about the bankruptcy process.
Myth: You will lose your home if you file for bankruptcy.
Truth: As long as you can afford your mortgage payment, you will probably keep your home. In fact, you may have a better chance of keeping your home in Chapter 13 if you have fallen behind on payments.
Myth: In bankruptcy you will lose your car.
Truth: As long as you can afford the payments, you will almost certainly keep you car. In fact, some equity in your car will be protected.
Myth: In bankruptcy you will lose all of your personal belongings.
Truth: Almost all of the ordinary items from daily life, from your toothbrush to your bed are automatically protected. Higher value items, such as flat screen televisions or expensive jewelry may not be, and you need to consult an attorney to be sure.
Myth: The new bankruptcy laws have made it much more difficult to eliminate your debt.
Truth: If you would have qualified under the old laws, you will almost certainly still be eligible.
Myth: Senior citizens filing bankruptcy risk losing their homes by filing.
Truth: Seniors actually have a higher homestead exemption, and are therefore very likely to keep their home in a bankruptcy.
Myth: If you file for bankruptcy, you'll never get credit again.
Truth: You can start to rebuild your credit after bankruptcy almost immediately. In a bizarre response, many lenders actually consider you a better credit risk after you have eliminated all of your debt. Also, they know you will not be able to file for bankruptcy again for six to eight years. Think about that before you feel start feeling bad about the credit card company losing money in your bankruptcy.
Myth: You will lose your 401(k) and retirement accounts.
Truth: All qualified retirement accounts are fully protected. Creditors cannot touch them.
Myth: Only irresponsible people file bankruptcy.
Truth: Bankruptcy laws are in place to allow Americans to start over, not make you feel like a deadbeat. Millions of hard-working people have gotten the fresh start they deserve after a personal setback or inability to keep up with high interest rates, late fees, and unfair penalties. And the top cause of bankruptcy is not irresponsibility. The biggest causes are medical problems, job loss, and divorce.
Myth: Bankruptcy will ruin your reputation.
Truth: Bankruptcy is public record, but it is not published in a newspaper. Generally, the only way people will know is if they search the Court records, if they are a creditor, or if you tell them.
Myth: Your credit score will never improve after bankruptcy.
Truth: Most people filing bankruptcy already have taken a hit on their credit score, so it will most likely not get worse. Also, there will generally be an improvement in your score after about a year as debt is wiped out.
Myth: If you're married, both spouses have to file.
Truth: Totally false. Separate petitions are permitted.
Myth: Bankruptcy wipes out all debt.
Truth: Some kinds of debt cannot be discharged. Examples include criminal fines, child support, student loans, and tax debts. There are limited exceptions, but in practical terms these debts will not be discharged. But credit cards, lines of credit, medical debt, and most other kinds of bills are discharged, and you will not have to repay them.
Myth: Creditors can still call after bankruptcy.
Truth: Once you file, all creditor collection actions must stop. If they keep trying, there are serious penalties under the bankruptcy code.
Myth: If you file for bankruptcy you will owe more taxes.
Truth: There are no tax increase for bankruptcy of any kind.
Myth: I already filed for bankruptcy and I cannot do it again.
Truth: If you filed a bankruptcy case but did not complete it, you may already be eligible again. You will need to talk to an attorney to find out. Also, if you previously filed a Chapter 7, you have to wait 8 years to file again. Chapter 13 varies, but generally you will need to wait six years.
Myth: You have to pay back all of your credit cards in Chapter 13.
Truth: In Chapter 13, you only have to pay back what you can afford to pay, with a few exceptions. Your payment in Chapter 13 will have to cover your secured debt (i.e., car loans, mortgages), the trustee's fee, and attorney's fee (if any is included in the plan). If you can afford to pay more than that amount, then your credit cards and unsecured debt will get paid something.
Email tomkelly@sonic.net | First consult is always free | 707-545-8700
