10 Common Bankruptcy Myths
1. I will lose all of my possessions.
Actually, most people who file bankruptcy don’t lose anything at all. The bankruptcy code provides exemptions to protect your property. Exemptions can allow you to retain a home, a vehicle, and other personal property. Of course, limits apply to these exemptions, and they vary by state. An attorney can help you determine if your property qualifies for an exemption. If it doesn’t, you may still be able to file a chapter 13 bankruptcy.
2. Bankruptcy laws have changed. I’ve been told I can’t file bankruptcy anymore.
While it’s true that bankruptcy laws recently changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the changes are not as drastic as you might think. Generally, more paperwork and documentation is required, and you will be required to participate in debt management classes. Your attorney can explain these requirements to you in more detail. The truth is, most people who previously qualified for chapter 7 bankruptcy protection still do.
3. Bankruptcy will ruin my credit forever.
Bankruptcy does affect your credit. But so does the inability to pay expenses, paying bills late, and even “maxing out” the credit already available to you. In addition to the marks on your credit report, you may be hit with overdraft and over-limit charges, late fees, and a higher interest rate on the credit you already have. Filing bankruptcy eliminates old debt, giving you a fresh start. In fact, bankruptcy often makes you a more attractive target for creditors, because they know that you cannot file again for several years. After your debts are discharged, you can begin to rebuild your credit.
4. My employer/friends/family will know if I file bankruptcy.
Bankruptcy proceedings are a matter of public record, but it’s unlikely that anyone will know that you filed. Unless you are a prominent person or a major corporation, the only people who will find out about your bankruptcy are the people you choose to tell. Even if your employer does find out, it’s illegal to take any kind of adverse action against an employee because he/she filed bankruptcy.
5. Even if I file, creditors will still harass me.
The bankruptcy code includes something called an automatic stay that prevents any creditor from attempting to collect debts from you once you’ve filed. That means that garnishments stop, bill collectors quit calling, and you won’t need to be afraid to open your mailbox anymore. If a creditor doesn’t follow the rules in the automatic stay, they may be punished. Of course, there are exceptions which your attorney can explain to you. If you have filed bankruptcy, bill collectors should contact your attorney.
6. Debt settlement programs are cheaper than bankruptcy.
We know you want to pay your bills. But most debt management programs rack up large fees for services that will not help consumers. You will be required to pay a set amount of money monthly into an account which will be used to settle your debt at a later point. In the meantime, you stop paying your bills. Don’t think that settlement companies will help you deal with creditor harassment during this period–they won’t. While your credit score plummets and you wait for the company to negotiate a settlement, your hard-earned money will be used to pay hefty fees.
7. I can always take out a home equity loan / borrow from my retirement account to pay off my bills.
If you own a home, you may have the option to take out a home equity loan to pay your bills. But be careful when considering the option, because you could be risking your home. If you are unable to meet the terms of your loan, the lender may be able to foreclose on your home. Talk to a qualified attorney about your best option as a homeowner.
You may also be tempted to borrow from an employer-provided 401k or other retirement account. For some consumers, this may be an option. But keep in mind that these types of loans are in effect a loan from your “future self” to your “present self”. Can your future self afford to pay your debts today, or would doing so leave you and your family significantly less prepared for the end of your working years? Paying unsecured debts (like credit cards) with borrowed retirement account funds gives your creditors to money they might not otherwise be able to get, and doing so may have tax consequences. Also, if you cannot repay the loan in a set period of time, you may have to pay a penalty of up to 10%. It’s helpful to consider that most retirement accounts are protected from your creditors in bankruptcy, allowing you to gain a fresh start without sacrificing your future. Your best bet is to talk to an experienced attorney before you decide to borrow.
8. Bankruptcy will prevent me from paying bills that I want to pay.
Nobody will stop you from paying a debt you wish to pay. Once your debts are discharged in bankruptcy, you may choose to repay any debt you wish. However, all debts must be listed on the bankruptcy petition filed with the court (see #10).
9. I’m married, so my spouse would have to file bankruptcy too.
In some cases it makes sense and saves money when a couple files for bankruptcy together. However, it’s not required. If only one spouse chooses to file, ask your attorney how it may affect both of you.
10. I can decide which debts to list in my bankruptcy.
Under the law, you must list all of your property and debts. If you want to continue paying on a debt after bankruptcy, you can. And if you have a loan that is secured by a car, your home or other property, you may need to stay current on payments in order to keep it. Even debts that will not be discharged, like student loans and child support, must be listed in your bankruptcy. In fact, there are penalties if you are not completely honest in your bankruptcy filing. Be sure to talk to your attorney about debts you wish to repay and any other concerns or questions you may have.
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