Ask anyone who’s dealt with a great deal of debt and they’ll tell you how frightening it is to struggle with keeping your head above water. For many, the thought of filing for bankruptcy is as scary as the bills themselves. However, bankruptcy’s reputation is based on only a few tidbits of truth combined with a lot of embellishment, sometimes just completely false statements.
Misconceptions surround bankruptcy engulfing everything from the implications of filing to the people who file. Yet, those who understand bankruptcy know that it’s nothing to fear. We’ve highlighted the 27 biggest bankruptcy myths below so that you can learn more about the bankruptcy process and what it truly entails.
1) Those Who File Bankruptcy Are Financially Irresponsible
Too often bankruptcy filers are regarded as reckless spenders who can’t manage their own money. While this may be the case in a handful of bankruptcy filings, a majority of filers are plunged into debt as a result of forces beyond their control. In fact, four of the largest causes of bankruptcy are medical expenses, job loss, divorce and unexpected expenses such as property theft or damage.
Between crippling child/spousal support payments, rising medical fees, and a tumultuous job market, it’s no wonder that well-educated, well-intentioned Americans are finding themselves in tough financial positions. A study conducted by Harvard University found that 62% of all bankruptcies were a result of medical debts and on top of that, 78% of those filers were insured. These statistics aren’t that hard to validate, considering health care deductibles have increased six times faster than earnings since 2010. The truth is, more often than not bankruptcy is not the result of a personal failing. Many individuals avoid bankruptcy fearing it is an admission of failure or a personal flaw, which is not the case.
2) Bankruptcy Eliminates All Debt
Many debtors pursue bankruptcy with the hopes of earning a clean slate. While bankruptcy offers a fresh start in many ways, it cannot eliminate all debt. Under a Chapter 7 bankruptcy, most unsecured debts such as utility bills, past due rent, credit card charges, medical bills, payday loans, personal loans and most civil judgments can be discharged.
On the other hand, most secured debts such as mortgages and car loans cannot be erased if you wish to keep that home or car. However, depending on your circumstances a Chapter 13 bankruptcy can lower the interest rate you pay on a car loan and/or lower the amount you owe on the car to its fair market value–it can even stop the repossession of a car or force the repo company to return your car if you file a Chapter 13 bankruptcy within a certain number of days of the vehicle being taken. In a Chapter 13, you can pay past due mortgage payments over a long period of time free of interest and penalties and stop foreclosure even after it has started. Taxes and student loans are extremely difficult to discharge in bankruptcy and special rules apply in order to do so.
3) Married Couples Have To File Together
As a married couple you and your spouse probably do plenty of things together. However, filing for bankruptcy is not something you are required to do as a couple. While married couples do not have to file together, there are situations where filing jointly may be beneficial. If you and your spouse share liability on a large portion of debt, then creditors can demand payment in full from the spouse that doesn’t file for bankruptcy relief.
4) Bankruptcy Permanently Destroys Your Credit
Under no circumstances will bankruptcy ever permanently destroy your credit. The question to ask yourself is what is your credit score now or where is it heading? Most people who are experiencing a financial hardship and considering bankruptcy have a credit score in the 500 range, and those who currently have a 700+ credit score, but just lost their job or incurred significant medical bills or being sued, etc. will soon see a sharp decline in their score with or without bankruptcy. However, a bankruptcy stops any further negative credit reporting and allows your credit score to increase after filing the bankruptcy and generally provides the fastest route to repairing your credit.
A 2010 study conducted by the Federal Reserve Bank of Philadelphia found that those who filed for Chapter 7 had an average credit score of 538.2 on the Equifax scale. In the six to eight months it took for the bankruptcy to finalize, scores jumped to an average of 620. Further, those who file bankruptcy, whether a Chapter 7 or a Chapter 13, can earn credit scores above 700 within 3-4 years after filing. You’ll also most likely receive credit offers for secured cards within weeks of your discharge.
5) Bankruptcy Is Immoral or Unethical
If filing for bankruptcy makes you a bad person, then over 1 out of every 55 american households is home to a bad person. In a year’s time from March 31, 2016 to March 31, 2017, a total of 770,901 individuals alone filed for bankruptcy, and it’s not because they are immoral people. In fact, the bankruptcy code was established under federal law to protect honest, hard-working people that fall on hard times. What does President Abraham Lincoln, Henry Ford and Walt Disney have in common? They have all been bankrupt in their lifetime! Yes, even the famous Dave Ramsey, the financial guru who scares his followers to not file bankruptcy, has filed bankruptcy.
While abuse of bankruptcy protection may exist in the form of bankruptcy fraud, bankruptcy is typically pursued because it’s one of the most positive, responsible, and honest steps you can take to start repairing your credit. Individuals in the military must follow a more strict set of laws than the average civilian, and among them, military personnel can be severely disciplined for excessive debt and the inability to pay such debt; however, the filing of a bankruptcy is the accepted and allowed method to deal with debts timely and responsibly without military discipline or loss of secret clearances.
6) You’ll Lose All Of Your Property If You File
Contrary to popular myth, a bankruptcy won’t leave you out on the street with nothing to your name. In fact, it’s rare that you lose any property in a Chapter 13 filing. Even if you file for Chapter 7, your house, vehicles, and clothes are generally considered safe. Often, many of the items that aren’t exempt aren’t seized. Creditors have no interest in items like flat screen TVs and smartwatches which either have little intrinsic value or are overly encumbered with debt.
7) You’ll Save All of Your Property If You File
Conversely, some individuals believe that bankruptcy is a more powerful tool than it actually is. You will be able to keep property that is considered exempt by the bankruptcy code, but your yacht or mansion may be in jeopardy. Assets that are rented or heavily leveraged cannot be used by creditors, so if you don’t fully own your property there’s a chance it could stay in your hands. Otherwise, property not protected by an exemption may be lost, especially luxury goods that aren’t attached to any debt.
8) A Shopping Spree Before Bankruptcy Will Allow You To Buy Things Without Paying Anything Back
Credit card debt is discharged in a Chapter 7 bankruptcy, but excessively spending on a credit card 90 days before filing the bankruptcy will not fly. Borrowing money with no intent to repay is against the law and doing so may be deemed bankruptcy fraud and require you to payback that debt.
9) Storing Property With Friends & Family Will Allow You To Keep It
Do not under any circumstances lend property to your family members or friends in order to intentionally conceal assets. Concealing or transferring property is considered a crime in the eyes of the bankruptcy court and is punishable with up to $250,000 in fines or five years in prison.
10) Filing For Bankruptcy Is Difficult
On the contrary, filing for bankruptcy is the opposite of difficult and the process is smooth, especially if you are represented by an experienced bankruptcy attorney. Although you don’t need an attorney to file for bankruptcy, there are still complexities to bankruptcy law that even non-bankruptcy attorneys are not aware.
It’s ill-advised to file for bankruptcy without an attorney, because you could jeopardize your bankruptcy and prevent yourself from receiving a successful discharge. It’s possible you may even cause yourself more financial harm than good, especially if you file for bankruptcy when other alternatives that may be a better fit for your unique situation. If you’re considering bankruptcy, it’s best to consult with an attorney before taking any other actions.
11) You Can Only File For Bankruptcy Once
It would be terribly unfortunate to find yourself in a financial rut more than once in a lifetime. Nonetheless, it does happen and the government recognizes that. Fortunately, you can file for bankruptcy more than once, but there are time limits.
If you’ve filed for Chapter 7, you must wait eight years before filing for another Chapter 7, or four years to file for Chapter 13. Conversely, if you file for Chapter 13, you must wait two years before filing for another Chapter 13, or six years to file for Chapter 7. Still, just because you can file for bankruptcy again, doesn’t mean you should. Additional bankruptcies should only be filed if absolutely necessary, and should carefully be planned with the help of an attorney as additional rules may apply.
12) Everyone Will Know You Filed
Bankruptcy is a public legal proceeding, but that doesn’t mean that news of your bankruptcy will permeate it’s way through your community. The only way to access your filing information is through a government database called PACER. To find your court information an individual would have to create an account and pay a per page fee on the court documents obtained. This kind of hassle prevents the average person from ever knowing that you filed. In reality, your creditors will probably be the only ones who know about your filing.
13) You Can’t Discharge Taxes In Bankruptcy
There are a plethora of different taxes that you can’t discharge in bankruptcy. Nevertheless, you can generally discharge income taxes as long as the taxes are at least three years old, you filed a timely return, and any additional assessment on the taxes were performed over 240 days before filing. Believe it or not, but if you paid any amount toward the taxes within the last three years, then that prevents that tax from being dischargeable.
The bankruptcy rules for discharging taxes can be complicated, but there are other benefits you can receive in regards to taxes when you file a Chapter 13 bankruptcy. If a certain portion of taxes are not dischargeable and need to be repaid, a Chapter 13 bankruptcy can eliminate future interest and penalties, which is a huge advantage for resolving tax debts.
14) You Can’t Discharge Student Loans In Bankruptcy
Chances are you’ve been told on multiple occasions that you can’t discharge student loan debt, because in most bankruptcy cases you can’t. Still, it’s not impossible to eliminate student loan debt in bankruptcy…it’s just incredibly difficult. You can earn a discharge on your student loans by proving that repayment would cause you undue hardship. Undue hardship must be proved through tests, which vary in methodology from court to court. Again, proving undue hardship is not easy, but it is possible in rare situations.
15) Only Those Behind On Bill Payments Can File
While a majority of bankruptcies are pursued after falling behind on payments, there’s absolutely nothing wrong with a proactive approach. If you find yourself bouncing balances back and forth or using home equity lines of credit to stay current on bill payments, then it’s probably time to consider bankruptcy. Keeping current with debt should not involve losing your home, savings, or retirement.
16) If You File For Chapter 13 You Will Have To Pay All Of Your Debts Back
Chapter 13 is a bankruptcy solution with the goal of reorganizing your debt in a way that you can afford to pay it off. Payment plans run the gamut from requiring repayment of all of your unsecured debts to repayment of none of your unsecured debt with no interest. However, Chapter 13 does allow for a reduction in interest rates or principal payments for certain secured debts, as well as, a discharge of debt in certain situations. The portion of unsecured debt that you pay is largely dependent on your disposable income. Still, if you’re filing for bankruptcy because you can’t pay all of your debts, it’s unlikely that you will have to pay all of your debts.
17) You Will Lose Your Bank Account If You File For Bankruptcy
Banks and credit unions will not even touch your account unless you owe them money. In the unfortunate event that you owe your bank money, they may put a freeze on your account while they collect what you owe, but if you speak to a bankruptcy attorney, there are ways to prevent the bank from collecting. Nevertheless, your account is generally safe and the money inside of it is typically protected as an exemption.
19) You Can Be Fired For Filing
It’s understandable for employment status to be a major concern in such an important financial decision. Nevertheless, federal law prohibits employers from discriminating against you for filing bankruptcy. Not only can an employer not fire you, but they also can’t demote you, reduce your salary, or take away responsibilities.
Additionally, there are many civilian and military individuals with secret and top secret clearances that fear they will lose their clearance by the filing of a bankruptcy. However, bankruptcy, to a certain extent, is an allowable method to responsibly deal with your debts and will not cause you to lose your clearance. In fact, if you are having financial difficulty and do not file for bankruptcy or otherwise timely resolve your debts, then you will certainly lose your clearance. If you have a security clearance and you are considering bankruptcy, it is important that you speak to a bankruptcy attorney who has represented clients with clearances at various levels and sensitive organizations.
20) You Can’t Afford To File For Bankruptcy If You Can’t Afford To Pay Your Bills
It wouldn’t make sense to prohibit individuals who can’t pay their bills from a legal system that helps individuals who can’t pay their bills. There are attorney fees/filing fees associated with filing for bankruptcy, but the money for those fees comes out of the money that you save from no longer having to pay certain bills. Long story short, if you can’t afford to pay your bills, you can still afford bankruptcy.
21) Bankruptcy Will Cause Divorce
There’s no denying that financial problems can tear a marriage apart. A survey conducted by SunTrust bank found that financial stress was the primary cause of 35% of all relationship stress. However, bankruptcy is not a financial problem. Bankruptcy is a financial solution. If anything, bankruptcy can help you eliminate or reorganize debt to alleviate much of the financial stress applying pressure on your marriage.
22) Debt Consolidation Is Always A Better Option Than Bankruptcy
Sure, the idea of lumping all of your debt into one large debt may seem appealing. You may receive the benefit of reduced interest rates and lower monthly payments, but debt consolidation isn’t always the best option. In many cases, bankruptcy allows you to repair your credit much faster, because it removes many of the financial obligations you are struggling to pay. Without the burden of debt weighing you down, you can more effectively focus on managing your money and building your credit. Generally, a debt consolidation requires securing the new consolidation loan with a home or a car, which then puts that asset at risk to lose.
18) Filing For Bankruptcy Will Prevent You From Owning Property
If you can afford additional property after bankruptcy, then there are no laws preventing you from buying cars, homes, equipment, household goods, and more. Eliminating debt puts you in a position to handle additional credit, which is attractive to many lenders. You might be surprised how quickly you’ll start to receive offers for credit cards and car loans after bankruptcy. The only downside is that these initial offers may require higher down payments. There are many clients who file Chapter 13 bankruptcy and while in the bankruptcy they are approved to purchase their first home or refinance at a lower rate than they had before the bankruptcy.
23) You Can’t File For Bankruptcy If A Creditor Is Suing You
You may feel stuck in a hopeless situation if a creditor is suing you for the money they are owed, but bankruptcy may provide you with a ticket out of the suit. The Automatic Stay offered in a bankruptcy can actually halt a lawsuit. Better yet, if the debt is dischargeable, it will be wiped regardless of whether or not the creditor has received a judgement. Being sued or about to have your wages garnished is a main reason to file bankruptcy and will stop that lawsuit and stop your wages from being taken.
24) You Can’t File For Bankruptcy If You’re Unemployed
Your ability to file for bankruptcy if you’re unemployed is dependent upon the chapter you wish to file. Unfortunately, you need a steady source of income to be able to apply for a Chapter 13 bankruptcy. Unemployment won’t stop you from being eligible for a Chapter 7 bankruptcy though. In fact, your odds of qualifying for a Chapter 7 bankruptcy are better if you’re unemployed. However, if you are receiving unemployment income, then that is a valid source of income if the filing of a Chapter 13 bankruptcy is better than a Chapter 7 in your particular situation.
25) You Can Decide Which Debts To Include In Your Bankruptcy
There are a lot of debts you’d probably like to wipe clean, but there are some you may not want to include in your bankruptcy. In reality, all of your debt must be included when you file. There is no way to keep one credit open while discharging all of the debt owed on another.
Often individuals wish to repay all of the debt owed to family, friends, and business partners. You can voluntarily pay debt after your bankruptcy, but that does not excuse you from including these debts in your bankruptcy.
26) Any Attorney Can Handle A Bankruptcy
In theory, any attorney could handle a bankruptcy filing, but that does not mean that any attorney would be fit to handle your bankruptcy filing. Even in seemingly simple bankruptcy cases there are complexities that are best navigated by an experienced bankruptcy professional.
Not every attorney will be able to recognize that the recent credit purchase you made will be considered fraud, the retirement assets you thought you could keep don’t belong to a qualified plan, or the payment you made to a creditor will be considered a preferential payment by the bankruptcy trustee. If you choose to file with an attorney who does not follow bankruptcy law and is not familiar with the views expressed by local judges and trustees, then you could risk losing everything.
27) Your Retirement Funds Should Be Cashed Before Filing
There is absolutely no need to take actions you’ll regret with your retirement funds. For the most part 401(k), 403(b), IRA’s and other various qualified retirement accounts are protected in a bankruptcy. It is worth noting that individual retirement plans (not employee plans) are protected by the federal exemption statute up to a cap of $1,283,025. The cap will not be a problem for the majority of Americans, considering the average U.S. retirement savings account totals $95,776.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.