Common Bankruptcy Myths- FACT OR FICTION?
The internet provides a vast and nearly infinite amount of information about any topic you can imagine. That being said, it should come as a surprise to no one that there is a large amount of information available to people considering filing for bankruptcy. Information in general is a great thing to have. However, misinformation, or inaccurate information can be more problematic than it can be helpful. A quick query on any search engine for “bankruptcy” will undoubtedly lead a person to any number of websites providing them information about the topic. Today, we hope to clarify some of the confusion about filing for bankruptcy and more importantly, debunk some of the myths surrounding it.
1. If I file for bankruptcy I will lose everything I have.
FICTION: This is likely the myth most responsible for dissuading people from filing bankruptcy. The truth of the situation is that only “non-exempt” property of a debtor is sold in order to fund the bankruptcy estate and pay off debts. That undoubtedly begs the question: what is “non-exempt” or “exempt” property? The federal and state bankruptcy codes provide exemptions to protect certain property of the debtors. This is exempt property. Any property that does not fit into an exemption category, or any property that does exceeds the value of the given exemption is considered non-exempt and could be sold to pay off debts. The important thing for any debtor to remember is that in the vast majority of bankruptcy cases, the debtor will finish the bankruptcy proceeding with all of their personal property and assets.
2. All debts are discharged in a bankruptcy proceeding.
FICTION: Although a majority of debts are in fact discharged in a bankruptcy proceeding, there are certain debts which are not discharged. The main areas of non-dischargeable debts include child support and/or alimony payments, some local, state and federal tax obligations (particularly those incurred sooner than 3 years from the filing), student loans and restitution for criminal acts incurred as the result of fraud.
3. My credit will be ruined forever.
FICTION: This is a very common misconception about filing bankruptcy. Although the bankruptcy does have a long-term effect on your credit score as it remains on your report for 10 years, it often surprises people to see that their credit score may improve slightly immediately after filing. Further, it will not be long before certain credit card companies begin sending offers for cards, albeit with high interest rates and very low balances. However, the opportunity will still arise shortly after filing to begin the rebuilding process. Larger purchases like a home may be more difficult to be approved for initially, but may be possible within a few years after a bankruptcy filing. There are even companies who work with debtors to facilitate the purchase of a vehicle following a bankruptcy filing.
4. Only irresponsible people file for bankruptcy.
FICTION: There is no denying that many irresponsible people have filed for bankruptcy. What people don’t realize is that many more responsible and hardworking people have filed after having no other alternative. The reality is that life sometimes takes a turn for the worst- people get sick, lose their jobs, experience marital problems or legal problems, among others. When these unfortunate circumstances arise, people who had always paid bills and paid them on-time, now find themselves unable to pay. They then turn to filing bankruptcy to get themselves a fresh start. In fact, this is the reason that our forefathers chose to constitutionally guarantee the right to file bankruptcy. Surely our forefathers did not intend to reward people for spending lavishly and living beyond their means- they meant to provide the opportunity for a constitutionally guaranteed fresh start.
5. Filing bankruptcy is the only true, surefire way of getting rid of debt and getting a fresh financial start.
FACT: Today there are many companies out there who promise to relieve people of their debts while avoiding filing for bankruptcy. These companies typically offer debt consolidation services where they settle your debts for a certain percentage of what is actually owed, saving the debtor what is seemingly a substantial amount of money. However, what debtors fail to realize is that they are still going to end up paying 50%-60% (or more!) of their total debt in addition to the company’s exorbitant fees. The amount being repaid is also dragged out over 48 or 60 monthly payments until the amount is paid off. By the way, miss one payment and you void your agreement and are back on the hook for all of your debts at their original amounts. Bankruptcy on the other hand, discharges ALL of your debt in a process that typically takes about 3-4 months and does not require ANY monthly payments. Further, once you are granted your discharge, you are relieved of those debts FOREVER and never have to worry about them again.
Some may argue that the damage to their credit is worse with a bankruptcy because it is reported for 10 years. However, in all likelihood the debtor’s credit score is already very low and not likely to increase in the near future. Additionally, one missed payment and all of that effort can be erased in a heartbeat. Combine these things with the fact that bankruptcy is a relatively quick process and that you can begin rebuilding your credit almost immediately there is no reason why anyone should ever consider these debt consolidation programs over filing for bankruptcy.
If you have any additional questions about any of the information you just read, please do not hesitate to contact our office to speak with one of our experienced bankruptcy attorneys today.