While the assumption that bankruptcy is the result of an inability to resist the temptation of credit cards, in an easy-credit society is true in many cases, most people file bankruptcy for other reasons.
Here is a look at some of the myths surrounding consumer (non-business) bankruptcy.
1. You have to be broke to file for bankruptcy
You don’t have to be penniless to file for bankruptcy. Bankruptcies are filed by people of all sorts of different backgrounds, occupations, incomes, and financial assets. There are different forms of bankruptcy, so your specific situation and financial condition will determine what form of bankruptcy will be best for you.
There are no financial guidelines as to who can file for bankruptcy. If you are employed, own a home, a car, other assets and personal property such as jewelry, furniture, television, stocks, retirement accounts, etc. – you may be surprised to learn that not only can you file for bankruptcy, but you will probably be able to keep most if not all of your assets.
2. Filing for bankruptcy means you are financially irresponsible
In some cases this may be true or is at least a contributing factor, but in most cases bankruptcy is the result of sudden catastrophic personal circumstances, the most usual of which is job loss, going through a divorce, or suffering a serious illness resulting in high medical debt.
3. Bankruptcy erases all of your debts
One of the reasons many people file bankruptcy is to get a new financial “fresh start”. To some degree this is a true benefit of bankruptcy, but some debt cannot be discharged through bankruptcy.
Domestic support obligations such as alimony or child support for example will not be eliminated by bankruptcy. Restitution judgements ordered because of a crime committed also cannot be eliminated Most student loan debts, particularly those obtained through government programs, cannot be eliminated. Many tax debts cannot be eliminated by bankruptcy.
4. If you run up your credit card balances right before bankruptcy you won’t have to pay that money back
Many people assume that they can charge their credit cards right before filing bankruptcy and then have those debts eliminated.
Not so. Courts have ruled that deliberately making credit purchases within 90 days of filing bankruptcy may be considered fraud, and a debt that is incurred as a result of fraud will not be eliminated.
5. Filing bankruptcy means you will lose your home, car, and possessions
Subject to certain limits and exclusions that vary by state, bankruptcy allows you to keep your personal possessions. Bankruptcy in fact protects your personal property and income from seizure, garnishment, or attachment by creditors.
Bankruptcy however does not erase current liens against personal property, like a car loan or a home mortgage. So if you want to keep personal property that is in lien you will have to continue to pay on the debt, and will usually have to sign a re-affirmation of that debt.
Often, eliminating most or all of your other debt will leave you in a better position financially to be able to continue making those house and car payments.
6. Filing for bankruptcy will make things worse
If you are already getting harassing calls from creditors threatening legal action or to garish your wages or seize assets, filing for bankruptcy will give you immediate protection. After filing for bankruptcy all collection efforts and legal processes to foreclose are required to stop until the bankruptcy case has been decided. This will give you significant breathing room and peace of mind.
Those debts which are eliminated through the bankruptcy proceeding are barred from all future collection action.
7. Filing bankruptcy will permanently ruin your credit
A common misconception is that a person can’t obtain credit again for seven to ten years after filing for bankruptcy. Actually there is no law as to when a person can obtain credit. People who file bankruptcy are frequently surprised at how quickly they start receiving credit card offers again.
Granted, many of these offers will be for low-limit high-interest secured credit cards requiring a deposit held by the issuing bank, but obtaining one of these cards and then making regular, timely payments will help to rebuild your credit and enable you to eventually qualify for lower-rate, unsecured cards.
Even major purchases like car loans and home loans won’t be forever out of reach. The key is to truly handle your bankruptcy as a “fresh start”, keep your new debt low, and make regular on-time payments to pay off those debts. Depending on circumstances, you may actually be able to qualify for a mortgage within two or three years of bankruptcy.
8. Everyone will know that I’ve filed bankruptcy
While bankruptcy is a court proceeding and a matter of public record, unless you are a public official or prominent member of society your bankruptcy is unlikely to become public knowledge unless you tell people about it.
While print media used to commonly print court actions like bankruptcy filings as legal notices, this rarely is done any more, and anyone with access to the bankruptcy court record system would have to specifically go looking.
In addition, because as a result of economic downturns so many people have filed for bankruptcy, that it is no longer the social stigma that it once was. In fact, it is entirely possible that a number of people whom you know and respect have gone through bankruptcy once or more in their lives, and you are not even aware of it.
Bankruptcy is a big decision
Whether bankruptcy is the best option for you depends on your personal situation and circumstances. To schedule a free initial consultation with an experienced bankruptcy attorney to review your situation and help you decide whether Chapter 7 bankruptcy is the best option for you, contact us today at 715-843-0800.