20 Biggest Bankruptcy Myths - Click on the myth to see the facts.
- Myth #1: Filing Bankruptcy Means You're a Bad Person.
There's a reason over 1,300,000 Americans filed for bankruptcy relief in 2011, and it's not because they're bad people. Lots of good, honest, hard-working people fall on hard times. The vast majority of the people who file bankruptcy are people, just like you and me, who file as a last resort. Our clients are doctors, teachers, constructions workers, retail workers, hair stylists, police officers, bankers, rich, poor, blue collar, white collar - you get the idea. They have spent months or years struggling to pay the bills left over from some life-changing experience, such as a serious illness, the loss of a job, separation or divorce, a failed business venture, or some family emergency...or because they honestly and mistakenly fell into debt at a young age before they knew better...before they knew anything about budgeting or how to manage money. Let's face it - life can be brutal, and sometimes the money's just not there. The bankruptcy laws were created with this in mind - to make sure you have a way, if need be, to get free from the burden of debt so that you and your family can have a second chance at a "fresh start". Bankruptcy is NOT a reflection of your character, but rather an option available under the law for families to obtain debt relief.
- Myth #2: Everyone Will Know You Have Filed for Bankruptcy.
Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors and the people who you tell. While it's true that your bankruptcy is a matter of public record, so many people have filed and unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed. As for newspapers, our experience is that very few papers include information about who filed bankruptcy.
- Myth #3: I Have To Be Broke Or Behind On My Bills To File Bankruptcy.
Do not wait until you've drained out your savings, or 401(K), or borrowed more money from relatives and friends. There are no rules that say you have to be behind or broke to file for bankruptcy. In fact, draining your retirement account may be a serious problem if done immediately before the filing of the Bankruptcy. Consult with The Brown Law Firm right away if you do not see a way out of your current financial situation, BEFORE you make costly mistakes that could affect your financial future.
- Myth #4: It Will Be Better For Me (And My Family) To Suffer And Try To Repay My Debts Rather Than To File Bankruptcy.
Ask yourself, how much money and how long will it take for me to get out of debt? Many people continue to suffer and make minimum payments not realizing that they will, in all likelihood, never get out of debt. Making minimum payments, at high interest rates, is exactly what credit card and loan companies want you to do. They want you to remain indebted to them forever. Do not make the mistake of getting trapped in this cycle ? never being able to live debt free. Bankruptcy laws were enacted to give you and your family a fresh start and the financial peace of mind you deserve
- Myth #5: Under The New Laws, You Can't File For Bankruptcy Anymore And You Must Repay All Your Debts.
We've heard a lot of misinformation about this. Some of the worst falsehoods are:
- The Bankruptcy laws have been repealed by Congress.
- If you didn't file for bankruptcy in 2005, you are no longer allowed to file.
- Only corporations can now file for bankruptcy.
- You cannot discharge credit card or medical bills under the new Bankruptcy laws.
- You will have to give up all of your vehicles if your file for bankruptcy.
- The IRS will audit all of your prior tax returns if you file for bankruptcy.
- You can no longer stop a foreclosure by filing for bankruptcy.
- If you file for bankruptcy, all of your bank records and tax records will be audited.
- An FBI agent will come to the home of every debtor and will take photographs of everything.
- Before you can file for bankruptcy, you must pass a written test. Likewise, you must pass another test to get out of bankruptcy.
- Before you can complete your bankruptcy case, you must pass a lie detector test.
- After you file for bankruptcy, you will never be entitled to another tax refund.
In fact, nothing could be further from the truth. The truth is that you can do almost everything under the NEW law that you could do under the OLD law. In some ways, the new law actually increased the benefits of filing bankruptcy. In a Chapter 7 bankruptcy case, debts are wiped out completely (discharged) with the exception of certain taxes, child support/alimony, student loans and specially designated debts. Medical and credit card debts are discharged. In Chapter 13, the amount you repay is based on your disposable income (money left after your expenses are subtracted from your income) or liquidation analysis (property that you cannot exempt). In the great majority of cases, 100% repayment is not required (or nowhere near it). It is imperative that you obtain accurate information before you can make an informed decision regarding bankruptcy.
- Myth #6: You Will Lose All Your Property When You File Bankruptcy.
In most cases, you can keep your home, vehicles, household goods and pension. Bankruptcy laws provide specific "exemptions" or "protections" for most possessions. Proper exemption planning will allow you to retain assets to enable a true fresh start. Only non-exempt (unprotected) property is subject to sale in chapter 7 bankruptcy, the rest you keep. When you file bankruptcy, your property becomes part of a bankruptcy estate, which the trustee oversees for the duration of the case. This does not mean that the Trustee automatically liquidates all of the assets that fall under their jurisdiction. For your purposes, it is important to understand that many thousands of bankruptcy cases are filed each year where the debtor does not lose a single piece of property.
- Myth #7: You Will Never Be Able to Own Anything Again If You File Bankruptcy.
A surprising number of people believe this....but it is completely false. In the future, you can buy, own and possess whatever you can afford.
- Myth #8: Even If You File for Bankruptcy, Creditors Will Still Harass You and Your Family.
In fact, nothing could be further from the truth. The minute you file bankruptcy, the Bankruptcy Court issues an order telling all of your creditors to leave you alone. No more phone calls. No more collection letters. No more lawsuits. No garnishments. No repossessions. No foreclosures. Nothing. This order has a name. It is called the "Automatic Stay"; and it is issued pursuant to Title 11 of the United States Code, Section 362. The Automatic Stay prohibits your creditors from taking any collection actions against you or your assets. Once you file bankruptcy, the creditor is not even allowed to talk to you. In addition, the creditor must stop any collection attempts already started. The Automatic Stay is very powerful, and puts the full weight of the United States Courts to work for you, to make sure your creditors leave you alone. If a creditor violates the Automatic Stay, you have the right to bring the creditor before the Court for Contempt of Court, and to be compensated accordingly. This is not a hollow right. Bankruptcy Court Judges do not take kindly to creditors who ignore their Order? the Automatic Stay? and these Judges have been known to punish creditors severely. Very simply, once you file for bankruptcy, creditors must leave you alone or suffer the consequences.
- Myth #9: You Do Not Need To Hire a Bankruptcy Attorney Because it is Just Completing Some Forms.
Bankruptcy is very serious business and anyone considering filing bankruptcy should know this before they embark on the process. BEWARE: the road to debt relief through bankruptcy can be fraught with peril. Even a basic bankruptcy can involve complicated legal issues and has the potential for litigation. The documents filed with the court have serious legal implications and you are subject to being prosecuted for perjury if you do not tell the truth. They are filed in federal court and scrutinized by trustees who are paid more if they liquidate your assets. You may be able to claim most of your assets as exempt, but trustees and creditors have the power to object to them. This is not intended to scare you away from bankruptcy, but it is wise to have an experienced bankruptcy attorney represent you to keep you from having problems.
- Myth #10: You Can't Afford To Talk To A Bankruptcy Attorney.
At The Brown Law Firm initial consultations are FREE. The Brown Law Firm provides payment plans for just about everyone; including those on a fixed income. We have worked with hundreds of debtors in the past and try our best to create a payment plan to help our clients manage their legal fees. The Brown Law Firm is pleased to offer our clients reasonable and flexible payment options to meet their needs. At the free initial consultation with our office, we will consult with you about your unique financial situation and provide you with in depth information regarding legal fees and payment options personalized to your situation.
- Myth #11: If I File Bankruptcy it Will Lower My Credit Score Forever and I Will Never be Able to Obtain Credit Again.
No reputable bankruptcy lawyer will tell you that bankruptcy is good for your credit score because it's not. However, if you are at serious risk of needing Bankruptcy, your credit score is probably already low. If you have defaulted on credit cards, home loans, car loans or student loans, creditors will already be reporting negatively on your credit report. Bankruptcy draws a line in the sand, and tells everyone that those debts are in the past. You may pay higher interest rates for a while as a result. But, you should be able to access credit and rebuild your FICO score within one year of filing since post-bankruptcy debtors usually have more disposable income, putting them in a much better position to responsibly borrow and finance. Post-Bankruptcy debtors then can use this available credit to rebuild good credit MUCH FASTER than you may think. Actually, many debtors are surprised at the number of credit card offers they receive post-bankruptcy.
- Myth #12: Using A Debt Consolidation/ Credit Repair/Tax Relief Company Is Better Than Filing Bankruptcy.
Debt Consolidation Companies.
Most debt consolidation companies are SCAMS, ruin your credit and ultimately FAIL. There is very minimal regulation on these companies and there are new debt consolidation companies "popping up" seemingly overnight. Many are being sued by governmental agencies or their former clients for fraud. Most of the time, the debt settlement companies will keep most of the money for themselves, leaving little for the actual settlement. Normally, we see that by the time our clients figure out that the company is not doing what was promised, several thousand dollars are lost to these debt consolidation companies and they are in worse financial condition than ever. There is nothing special about the relationships between debt settlement companies and credit cards/debt collectors that guarantee settlements. In many cases, debt consolidation services have no leverage and no means of providing lenders with incentives to agree to a debt consolidation. Even assuming they do settle, what the creditors and debt settlement companies don't tell you is this: the amount forgiven will be considered income to you and you may be taxed on the amount forgiven.
Credit Repair Companies.
The promises of Credit Repair Companies to "fix" your bad credit rating or to erase your bad credit usually are nothing more than ways to take your money. Business is brisk among these so-called "credit-repair" companies that charge $50 to more than $1,000 to fix your credit report. In many cases, these companies take your money, do little or nothing to improve your credit report and then vanish.
There are no quick or easy fixes for a poor credit history. If a company promises to clean up your credit report, remember:
- Your credit
history is maintained by private companies called credit bureaus that
collect information reported to them by banks, mortgage companies,
department stores and other creditors.
bankruptcy can help, only time and a history of timely debt payments will
heal a poor credit history - even if your problems were due to illness or
reporting agencies are permitted by law to report bankruptcies for 10 years
and other negative information for seven years.
Tax Relief Companies.
BEWARE OF "TAX RELIEF COMPANIES". You may have seen so-called "tax relief companies" that advertise on TV claiming that they can "settle your tax debts for pennies on the dollar". DON'T YOU BELIEVE THEM!!!! Many of these companies are in bankruptcy and/or are being sued by their customers and governmental agencies for consumer fraud and theft. Those companies and others have thousands of complaints filed against them with the Better Business Bureau because they took their client's money and didn't provide any or provided only a few of the services they promised. In fact, we've had a number of customers of these "tax relief companies" come to us for assistance after they were duped by these companies. Don't waste your time or money with them.
On the other hand, bankruptcy proceedings are backed by the power of the federal bankruptcy code. When you file for bankruptcy, you do not have to get your creditors to agree. Your rights are enforced by the bankruptcy court. Bankruptcy is much more certain and there is no "scam" involved.
- Myth #13: If You Filed Bankruptcy Before, You Cannot File Again.
In some instances, the bankruptcy law will permit a new discharge in as little as four years. Changes made to the bankruptcy law in 2005, created a scenario where debtors can seek Chapter 7 relief once every eight years. However, debtors can seek Chapter 13 relief after four years following a Chapter 7 bankruptcy.
- Myth #14: If You Have Been Sued By A Creditor It Is Too Late To File For Bankruptcy.
Bankruptcy will immediately STOP a lawsuit, foreclosure, sheriff's sale, levy and/or wage attachment. The Automatic Stay under section 362 of the Bankruptcy Code is a very powerful provision. This Section of the Bankruptcy Code directs all creditors of a debtor to cease collection activities. There is very little "wiggle room" or exception to this section of law, meaning that it routinely stops a lawsuit or judgment collection in its tracks.
- Myth #15 - I Have Large Unpaid Tax Bills And I'll Never Get Out From Underneath Them.
Tax debt relief is possible with bankruptcy. If the taxes can't be discharged outright, in many cases, The Brown Law Firm can negotiate with the tax entity to reduce the taxes you owe, and/or obtain an extended payment plan on the remainder. This can greatly reduce the taxes you owe, and give you the breathing room you need to make a financial recovery.
- Myth #16: You Should Cash In Your 401K Or Retirement Plan Before Filing For Bankruptcy.
Retirement funds are "exempt" or protected in bankruptcy. Believe it or not, there is no "limit" to the exemption, meaning that a debtor can retain the retirement funds so long as they remain within the retirement account. If you decide to draw upon your retirement funds prematurely to pay creditors it could: (1) have serious income tax ramifications and (2) jeopardize your financial future. Pulling retirement monies out can be very expensive as taxes and penalties must be paid on the withdrawal. Many people that do such are stunned by the taxes owed at the end of the year, long after the monies are gone, hence creating yet another headache now with the IRS. With the future of Social Security in jeopardy, financial planning for your future is now more important than ever.
- Myth #17: If You're Married, Both You And Your Spouse Have To File For Bankruptcy, And Even If Only One Spouse Can File, The Bankruptcy Filing Of The Filing Spouse Will Ruin The Credit Of The Non-Filing Spouse.
Fortunately the Bankruptcy Code permits an individual spouse to file bankruptcy without the need for the other spouse to "join in" on the filing. Not only can the filing spouse eliminate individual debt, but the non-filing spouse's credit should go unaffected. The key is that the filing spouse must have only individual debt. Joint credit cards can create problems in this scenario. (This is different from an authorized user scenario Akin to this "myth", a bankruptcy filing by an individual before marriage will not affect the credit of a new spouse.
- Myth #18: If You File For Bankruptcy, It May Cause More Family Troubles And May Even Lead To Divorce.
Usually, it works just the opposite. Filing bankruptcy is not the problem. The problem is not being able to pay your bills. All good, honest, hard-working people feel a strong need to pay their bills, and not being able to do so causes them tremendous stress. Unless you do something to relieve this stress, the stress can quickly build to the breaking point....and in some cases, the breaking point of your marriage. Bankruptcy is designed to get you out from under the weight of debt and collectors, to protect your property and to lower your stress level. If your experience is like that of other couples, you will find that filing bankruptcy and lowering the stress level can be a crucial first step in bringing the love and caring back into your relationship....which, in turn, gives your marriage a fighting chance.
- Myth #19: After You Take The Credit Counseling Course You Must Wait 6 Months Before You Can File A Bankruptcy.
In fact it's the opposite. One you take the credit counseling course and receive the certificate, the certificate is valid for 180 days. You must file bankruptcy within that 180 day period to use the credit counseling certificate. If you wait too long and the credit counseling certificate expires, you will have to take another credit counseling course and get a new certificate. We provide clients with information about credit counseling providers that we find are cost-effective and consumer friendly. In short, there is no waiting requirement after completing credit counseling to file for bankruptcy.
- Myth #20: You Can Lose Your Job Due To Bankruptcy.
Federal law (11 U.S.C. Sec. 525) prohibits any employer from discriminating against you because you filed bankruptcy. This is a VERY common QUESTION, but it rarely plays out in the "real world". We have represented hundreds of debtors and have NEVER seen someone fired for a bankruptcy filing. So, we've never even used 11 U.S.C. Section 525. In reality, an employee that has filed for bankruptcy has much LESS temptation to misappropriate funds or anything of that nature, as they are being relieved of personal financial pressure. I would argue that you are a BETTER employee following a bankruptcy, as you can now truly focus on your job rather than worrying about the mountain of debt and creditor calls that exist in your personal life.
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