Common Bankruptcy Myths

Common Bankruptcy Myths

 

MYTH #1
I must be dead broke to file for bankruptcy
This is completely false and 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.

MYTH #2
Bankruptcy ruins credit scores
Financial trouble ruins credit. Credit scores begin to plunge as soon as assets run out to keep payments going. Negative activity stays on your credit report for 7 years and longer if creditor sues and records a judgment and lien on your property.Although bankruptcy stays on a credit history for 10 years, because it will eliminate your debt you have a chance to start over and your score begins to recover long before the bankruptcy is erased from your credit 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.

MYTH #3
If I file for bankruptcy I will lose my home/car
One goal of bankruptcy is to protect you and your assets. It’s important to disclose all of your property to your bankruptcy attorney so that they can advise you if your assets can be exempted under state law allowing you to keep them. If the equity in the home/car (equity: value of the item minus any loans on it) is negative or below the “exemption” limits you can keep the asset as long as you remain current on the payments.Under Chapter 13, even if you are behind on payments and facing foreclosure or repossession, you may be able to keep the property as long as you propose a feasible plan for getting current.  In other words you get to reorganize the debts, catch up on late payments to bring loans current. 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.

MYTH #4
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.  There is also a burden of proof that rests on the debtor if the debt was incurred just prior to the filing of the case.
MYTH #5
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. These funds are considered untouchable and should be kept for their intended purpose – your retirement – not handed over to creditors.  If you are contemplating using retirement funds for settlement go carefully.
MYTH #6
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 want tenants who can afford to pay the rent and have no history of being evicted from property due to non payment.
MYTH #7
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. Outside of FHA loans, other loans are also available 3 years after discharge, provided of course you qualify in other terms and can show proof of adequate income to afford mortgage payments and an adequate down-payment.
MYTH #8
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. The income must be considered in light of financial obligations and living expenses. If your income is above the Median for the size of your household, a proper Means Test analysis needs to be performed to deduct allowable expenses from your income and see if your disposable income after that calculation is too high to receive a discharge under chapter 7.  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 toward either debt settlement, credit consolidation, or Bankruptcy reorganization under Chapter 13 solutions.
MYTH #9
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).  Entrepreneurs and business owners have also used Bankruptcy as a way to restructure their ventures and turn around a failing business.  Notably, Donald Trump (real estate financier, President) has in the past used restructuring Bankruptcy to reorganize failing businesses. 

See

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 want to obtain and review an account transcript, which will provide key facts used to determine whether the income tax owed has met the discharge requirements.  If the income tax cannot yet be discharged, the question becomes if it makes sense to wait until it does, or deal with it through a restructuring type of bankruptcy under Chapter 13 or if alternatives such as Offer and Compromise are a better choice. 
MYTH #11…

 

 

 Talk to an attorney and get your questions answered instead of relying on myths.
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