Common Bankruptcy Myths

Don’t Rely on Common Bankruptcy Myths

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I must be dead broke to file for bankruptcy
This is completely false and very unwise!!!

It is better to consult with a bankruptcy attorney to learn how to protect your income and your assets before you are completely penniless.
A fresh start doesn’t mean dead broke.

Bankruptcy ruins credit scores
Financial trouble ruins credit. Credit scores begin to plunge as soon as assets run out to keep payments going. Account activity, when reported properly, stays on the credit report for 7.5 years. Bankruptcy stays on a credit history for 10 years.  However the scores improves dramatically fairly quickly and long before the bankrutpcy is removed from the report.

It might be surprising to learn that if your score is already low, and if you have fallen behind on payments chances are it is, the filing of bankruptcy can actually increase 100-200 points within a year, sometimes even sooner, after filing of the case. Also consider that potential landlords and creditors are looking at the Debt to Income ratio. A high ratio due to old debt listed on the credit report, prior to the filing bankruptcy, can make it impossible to obtain financing or rent a new place to live. After a bankruptcy discharge, your debt to income should improve and that makes you a better credit risk.

If I file for bankruptcy I will lose my home/car
One goal of bankruptcy is to protect you and your assets. It’s absolutely imperative to disclose all of your property to your bankruptcy attorney.   The attorney can then advise you if your assets can be exempted under state laws. If the equity in the home or car is negative or below the “exemption” limits you can keep the asset as long as you remain current on the payments. Equity is the value of the item minus any loans on it.  Under Chapter 13, even if you are behind on payments, facing foreclosure or repossession, you can keep the property if you propose a feasible Chapter 13 Plan that brings the loan(s) current. In other words, you reorganize the debts, catch up on late payments and keep the collateral. Once in Chapter 13 bankruptcy, even if you are significantly behind on the loan(s), lenders have no choice but to cooperate so long as you maintain your Chapter 13 plan payments.

If you are having trouble making car loan or mortgage payments but have been paying on credit card debt or medical bills, Chapter 7 can discharge the unsecured non-priority debt like credit cards and free up cash so that you can stay current on your secured debt, like mortgage and car loans.

You should max-out all of your credit cards before you file for bankruptcy
If you purposefully max out your credit cards intending to declare bankruptcy, you commit a fraud. Consult a bankruptcy attorney as soon as your debt goes out of control. If you know you can’t repay or decided to declare bankruptcy, stop using the credit cards. Creditors carefully scrutinize the most recent transactions. The burden of proof rests with the debtor if the debt was incurred just prior to the case filing.
You should deplete your retirement funds (401K, IRA, pension) before declaring bankruptcy
Absolutely Not! Retirement funds serve a super important purpose and the government has seen to it to protect these funds from the creditors. Be prudent with these protected funds.  They should be kept for their intended purpose, your retirement, not handed over to the creditors. If you are contemplating using retirement funds for settlement go carefully.
No landlord will rent me an apartment if I have bankruptcy on my record
This is simply wrong. Landlords are more concerned when potential tenants have unpaid financial obligations or unlawful detainer (eviction) on their record. Landlords prefer tenants who have sufficient income to pay the rent.
I’ll never be able to buy a house after bankruptcy
FHA loans are available to qualified buyers as long as the bankruptcy discharge occurred more than 2 years, less than 2 years if there are extenuating circumstances that caused you to file for bankruptcy such as an illness or accident which resulted in unmanageable medical bills. Many loans are available 3 years after discharge.  Of course one must qualify in terms of adequate income, down-payment.
I make too much money to qualify for chapter 7 bankruptcy
It is absolutely wrong to say that high income makes a person illegible for chapter 7 discharge. High DISPOSABLE income could be problematic. We calculate disposable income by subtracting reasonable and necessary expenses from the income. A “Means Test” needs to be performed if the household income is above the median.  Means Test deducts allowable living expenses from the income to determine the disposable income. Even if one initially fails a Means Test there may be a way to pass it or get an exception. Individuals who cannot obtain a chapter 7 discharge should look at debt settlement, credit consolidation, or Chapter 13 bankruptcy reorganization.
I’m a loser for filing for bankruptcy
If you’re feeling alone or depressed because of your financial trouble take note that you are in very good company. Many successful people from all sorts of professions and walks of life have at some point sought bankruptcy protection. Most notably, Thomas Jefferson (President), Mark Twain (author), Mozart (composer), Henry Ford (auto magnate) Wayne Newton (entertainer), Ulysses S. Grant (President), Dorothy Hamill (figure skater), Larry King (talk show host), Burt Reynolds (actor), Walt Disney (creator of Mickey Mouse) Milton Hershey (chocolate magnate) Rembrandt (painter), Oscar Wilde (playwright), PT Barnum (circus promoter). Consider that entrepreneurs and business owners have also used Bankruptcy as a way to restructure and turn their failing businesses around. Notably, President Donald Trump has in the past used a type of restructuring Bankruptcy to reorganize some failing businesses.


MYTH #10
You can’t get rid of income taxes in bankruptcy
Under the current laws there are some qualifications that must be met for income tax debts to be discharged in Chapter 7 Bankruptcy. The attorney will obtain and review an account transcript. An account transcript shows key facts to determine whether the owed taxes can be discharged. If the income taxes are not yet dischargeable, does it make sense to wait?  Are there compelling reasons to move forward with the Bankrutpcy regardless of non dischargeability?  Will submitting an Offer and Compromise provide relief?
MYTH #11… Talk to an attorney and get your questions answered instead of relying on myths.