Article- Bankruptcy Misconceptions

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Bankruptcy has long been associated with various myths and misconceptions, which have often played a role in many individuals continuing to struggle with poor credit, losing their home, and other financial hurdles which may have been better served by filing for bankruptcy.

For your convenience and general edification, we will discuss the most common misconceptions, so that you know the truth about various bankruptcy myths which hold people back from getting on the road to financial recovery and a fresh start.

All debts are wiped out in Chapter 7 bankruptcy

While most debts may be discharged in a Chapter 7 bankruptcy, there are exceptions which may not be discharged such as child support payments, alimony payments, student loans, and debts incurred as the result of fraud.

I will lose everything

This is one of the most common bankruptcy misconceptions that often instills fear of filing for bankruptcy, especially for those who people who may be best served by filing for bankruptcy. Many people are confused about how their possessions will be affected because of a bankruptcy. In most bankruptcy cases, you may be allowed to keep certain kinds of assets, such as your home, your car (up to a certain value), money in qualified retirement plans, household goods, and clothing. Bankruptcy laws may differ from State to State, however, the experience of your bankruptcy attorney may be the difference in achieving your bankruptcy goals and needs. Being informed and represented by professional legal counsel is highly recommended in any bankruptcy case or situation.

I’ll never get credit again

In many cases, a successful bankruptcy may help you improve your credit over time. Many individuals and families have reported being offered credit cards, being approved for car loans, and other types of credit within 2 to 3 years. Granted the interest rates will initially be higher, spending wisely, and using your new-found credit wisely will re-establish your credit, provide you a higher credit score, and eventually lower the interest rates you are offered. If an individual spends wisely and uses this fresh start in a manner which benefits their financial well-being, they may be able to obtain a higher credit score than before they initially started getting into financial difficulty. We don’t advise our clients to run up a lot of bills, but you spend wisely and make all future payments if you need to get an automobile you will be able to get credit.

If you’re married, both spouses must file for bankruptcy

This is not only always the case, and in some circumstances, it is advisable to have the partner with the debt to file bankruptcy as an individual, such as if one spouse has significant debt in his or her name only. In the case which both spouses have debts they want to discharge that they are both liable for, they should file for bankruptcy together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who did not file.

It’s very difficult to file for bankruptcy

Bankruptcy laws, while confusing to many, if they seek experienced legal counsel to represent them, the bankruptcy process may be much easier than most people would think. To ensure the bankruptcy process goes as smoothly as possible with a reduced possibility of complications, it is recommended that you hire a lawyer to make sure that it’s all steps are properly administered.

It is immoral and shameful to file bankruptcy

Not true at all. Especially in the current state of our economy. People file for bankruptcy for various reasons, such as a divorce, after losing a job, investments which have failed due to the stock market, after the death of a spouse, after a serious illness, being injured and unable to work, mounting medical bills which make it almost impossible to pay, or a host of other reasons. The important thing to remember is that a successful bankruptcy allows you to get a fresh start and give you the ability to rebuild your credit in a manageable and responsible manner. Following a legal path which allows you to get back on your feet and overcome the financial burdens which have held you and your family hostage. There is nothing embarrassing, immoral, or shameful about that at all.

I should not include certain creditors in my filing because it’s important to me to pay them back someday and if the debt is discharged, I can’t ever repay them

Having the desire to make sure you can pay some debtors is a commendable trait to have. Being able to accomplish this in the event of a bankruptcy may be accomplished if you file for a chapter 13 personal bankruptcy instead of Chapter 7 personal bankruptcy. This would not be able to be accomplished in Chapter 7 personal bankruptcy as in Chapter 7, all debt is released if granted by the bankruptcy court. In chapter 13 personal bankruptcy, it is a restructuring of the debt which is put into a payment structure, often in a reduced amount of the debt, which allows you to keep all personal property and assets if you agree to make all payments set up by the court to creditors you owe. However, in Chapter 7 and a Chapter 13 personal bankruptcy is an all-or-nothing deal, so you must include all your creditors in either bankruptcy petition.

You can’t get rid of back taxes through bankruptcy

Generally speaking, this is true. However, the current bankruptcy law does allow specific exceptions. To have a chance of success, you must file all your returns and the taxes owed, and the tax returns need to be at least three years old. To find out if you qualify for an exemption for back taxes in a bankruptcy, you should seek experienced legal counsel who can advise you of your legal rights and assist you in your bankruptcy goals.

You can only file for bankruptcy once

Based on this statement, the answer is technically untrue. Depending upon the type of personal bankruptcy you file there are time restrictions on how long you must wait before you are able to file for bankruptcy again. In Chapter 7 personal bankruptcy you can only file once every eight years. For Chapter 13 reorganization, you can file more often than that, but you cannot have more than one case going at one time. While multiple bankruptcies are allowed under specific guidelines, additional bankruptcies will be heavily scrutinized, and it is not in your best interest to make filing bankruptcy a habit, as the potential for being awarded a successful bankruptcy may be dramatically reduced with each additional bankruptcy you file.

I can max out all my credit cards, file for bankruptcy, and never pay for the things I bought

First, it is important that to note that when a creditor contacts you, the phone conversation is typically recorded, as well as all correspondence saved. Many times, in anger or frustration, an individual who is being hounded by creditors makes statements which may elude to this being their intention. If the creditor can present such evidence, the judge who presides over your bankruptcy case may not rule in your favor or grant you a successful bankruptcy. You may also end up being charged with fraud, as it is illegal to intentionally purchase items because you are intending to file bankruptcy, and having the accrued debt included in the bankruptcy. Purchasing history may be called into question not only for the credit card in question but all recent purchases as well. If you are charged with fraud, it is a serious criminal offense which will be aggressively prosecuted. The trustee in your case will review all your purchases right before your filing. And the trustee knows what to look for to find fraud. In short, if you are contemplating filing for bankruptcy, speak with an experienced attorney so that you are made aware of purchasing habits which may send up red flags or cause complications in your bankruptcy case.

Everyone will know I’ve filed for bankruptcy

Even though bankruptcy is a public proceeding, generally the only people that are aware of your bankruptcy are your creditors and those who run a credit check after your bankruptcy such as in a new housing application or for an employment position you are seeking. With the state of the economy, even in those situations, the entity doing a background check may not give as much weight of a recent bankruptcy as a few years ago. Chances are that a recent bankruptcy will not affect your future life choices as much as one would think. Current employment status and work history are typically more important in many of life situations, and this also holds true following a bankruptcy.


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