Common Myths About Filing Bankruptcy
Filing bankruptcy is never easy, but the myths and false facts about filing and how it will affect your life are rampant. Your friends will have opinions. Your trusted advisers will tell you why you shouldn't do it. Even the Internet gets it wrong. Read on while we debunk some of the more common ones.
1. Filing Bankruptcy Means I'm a Failure. NOT TRUE!
This is probably the worst and most pernicious myth out there. Our founding fathers recognized the value in filing bankruptcy and included it in the U.S. Constitution (Art. 1, Section 8, Clause 4). Several studies over the past 10 years have shown that most bankruptcies are caused by issues outside the control of most folks, including crushing medical debt, job loss, and divorce. Few people file bankruptcy because they mismanage their money. Even then, it doesn’t mean they’re a failure because they file bankruptcy. Just the opposite. It shows that they understand the need to correct their issues, and they’re doing something about it.
2. I’ll Lose All My Property If I File Bankruptcy. NOT TRUE!
No one's going to swoop in and cart away your 20-year-old sofa or your kids’ toys. If you’re an individual or a couple, you’re allowed to keep certain items up to a certain value. These are called exemptions. Due to exemptions, people will have to give up property in less than 5% of bankruptcy cases. Exemptions vary by state, but in almost all states you can exempt your household goods, at least one car, clothing, your retirement savings, and even equity in your home.
3. All My Debts Will Go Away (and I'll Get My Car and House for Free!) NOT TRUE!
Most of your ordinary credit card balances, medical debt, and personal loans will go away (be discharged), but there are exceptions.
Some debts won’t be discharged. Student loans are very difficult to discharge. Recent income taxes are not dischargeable. Domestic support obligations like past due child support and alimony will not be discharged. Some debts are ordinarily not dischargeable but can be under certain circumstances.
If you want to keep your house, your car, or other property pledged as collateral on a loan, you’ll have to continue paying for it. This is called a reaffirmation. Even when the bankruptcy eliminates your obligation to pay back the money you borrowed, it does not discharge your obligations under the security agreement that gives your lender rights in the property if you don’t pay. You can choose to surrender your collateral to the lender without penalty in a bankruptcy, but if you want to keep it, the workaround is a reaffirmation.
4. I'll Never Be Able to Get Credit Again. NOT TRUE!
You’ll begin to see credit offers in the mail within weeks after you emerge from bankruptcy. Many lenders consider you a better credit risk then because you’ve eliminated a lot of your obligations and you can’t file bankruptcy again for some time. You’ll pay more in interest in those early days, but it might be worth it because it will help you re-establish good credit sooner. Most people find that their credit score has increased into the “good” or even “excellent” range as early as two years after their case is discharged.
For mortgages, you'll have to wait a little longer. Most mortgage lenders and insurers (like FHA, VA, Fannie Mae, Freddie Mac) require that you wait a minimum of two years after discharge before you apply and that you work to re-establish good credit during the waiting period.
5. I'll Lose My Job If I File Bankruptcy. NOT TRUE, Mostly.
The bankruptcy laws contain anti-discrimination provisions that apply to the government and to many private employers, but in most states, employees can be fired for virtually no reason at all. That said, most employers, especially those with a larger workforce, only take a bankruptcy into consideration if you’re going to handle money. Even then, bankruptcy can work in your favor because it shows that you’re working to solve your problems. This is the position that the federal government takes when considering security clearances. If your finances are a shambles, you’re much less likely to be approved than if you file bankruptcy to resolve them.
6. Paying Off My Debts Is Always a Better Option. NOT TRUE!
This is not true for any number of reasons. It can take you years to pay off those debts. You may be able to eliminate them in a few months with a bankruptcy case and rehabilitate your credit in two years with care. Sometimes, you just can’t pay off the debts because there’s too much debt to ever get a handle on.
Sometimes you're facing foreclosure or repossession and just don’t have the time or immediate resources to prevent it.
7. Bankruptcy Is Expensive. NOT TRUE!
Bankruptcy is an investment. Yes, it can cost a few thousand dollars to file a bankruptcy case if you hire an attorney. But you’re potentially eliminating many many more thousands in debt. Not to mention the worry, stress, frustration, fear, and money you’ll put out in the coming YEARS if you don’t act now. Talk with a consumer bankruptcy attorney about your options. Most will not charge for an initial consultation. They can help you with strategies for coming up with the money.
8. I Make Too Much Money to File Bankruptcy. NOT TRUE!
Almost anyone can file a bankruptcy case. To file a Chapter 7 straight bankruptcy, your income has to qualify under what is known as the ‘means test.” The means test is designed to judge whether you have enough income to make a meaningful dent in your debt, rather than be allowed to discharge it all outright. If you “fail” the means test, you can almost always file a Chapter 13 repayment plan case. You’ll make payments for three to five years to pay down your debt, but often you’ll pay a lot less than you would trying to pay down those accounts and rehabilitate your credit a lot sooner than you would on your own.
9. Bankruptcy Will Solve All My Financial Problems. NOT TRUE!
Bankruptcy can eliminate your obligation to pay your debts, but it cannot reform your spending habits, make sure you have a job that pays you enough to support your lifestyle, change your taste in the finer things in life, or salvage your marriage. It can be the start of a new way of thinking about money if you take advantage of it.