Bankruptcy Myths– BUSTED
There is a lot of false information regarding bankruptcy. Here is a list of the most common myths we’ve encountered.
1. My employer will find out and fire me, or my potential future employer will not hire me because I filed for bankruptcy.
Usually FALSE. Discrimination solely because you filed for bankruptcy is prohibited under the U.S. Bankruptcy Code. Certain persons with security clearance and sensitive financial positions can have issues with bankruptcy, though even then, a Bankruptcy can show that you are dealing with the problem, and enable you to have the security clearance or sensitive financial position. The exceptions to this are positions that tend to handle money, like bank tellers.
2. I have to be broke or behind on my bills to file bankruptcy.
FALSE. Do not wait until you’ve drained out your savings, or 401(K), or borrowed more money from relatives and friends. There are no rules that say you have to be behind or broke to file for bankruptcy. In fact, draining your retirement account may be a serious problem if done immediately before the filing of the Bankruptcy. Consult with a bankruptcy attorney right away if you do not see a way out of your current financial situation, BEFORE you do something.
3. Bankruptcy is not affordable.
FALSE. We do our best to provide reasonable time to pay attorneys’ fees and costs. In fact, many clients find that stopping payments to credit cards for a couple of months cover attorneys’ fees. In Chapter 13, usually part of the fees are paid up front and some through the plan payments. Additionally, because many of our clients have violations of the law, they end of getting their money back from the debt collectors who come after them.
4. I will lose my home.
Usually FALSE. In Chapter 7, as long as you are current on your payments and meet the equity limits, you can keep your home. In Virginia, there is an exemption up to the following amounts:
(1) $5,000 for each debtor.
(2) an additional $500 per child under age 18.
Refer to Virginia Exemption Chart.
You are given the same equity limits in Chapter 13 as Chapter 7. But you do not have to be current on your mortgage. In Chapter 13, you are given up to 5 years to repay the missed mortgage payments.
5. My credit is destroyed forever.
FALSE. Bankruptcy is reported on your credit report for up to10 years (see 15 US Code section 1681c). Most people mistakenly believe that they get a Scarlett Letter stamped on their forehead and won’t be able to get credit for 10 years (or some even believe for life). In fact, most of our clients get credit offers within a few months after filing. Bankruptcy stops the bleeding and places you in a position to rebuild your credit worthiness. Clients usually start with credit cards with smaller limits. They use these wisely (never carrying a balance), and get higher limits. The credit score increases and permits more extensive credit such as car loans. It’s similar to building credit for the first time like a high school or college student graduate. Additionally, Krumbein Consumer Legal Services is one of the few law firms with the experience and skills to help make sure that your credit is accurate. With Bankruptcy, your debts should stay in the past, not follow you along forever.
6. I will never get a home, an apartment or car.
FALSE. People do rebuild their credit after bankruptcy and go on to buy homes and/or cars. Your credit score may actually increase after bankruptcy, especially since bankruptcy will have a positive effect on your debt-to-income ratio. Additionally, some clients have purchased a home because of the efforts of Krumbein Consumer Legal Services to correct the errors on their credit report.
7. You can’t go bankrupt anymore since the new law.
FALSE. As the business and consumer bankruptcy filings that have exceeded well over 1 million people per year show, this is not the case. The 2005 changes to the bankruptcy laws made it more difficult to file for bankruptcy, but we have spent a significant amount of time using the amendments to our clients’ benefit. Consult with a Richmond bankruptcy attorney from Krumbein Consumer Legal Services to determine how you qualify.
8. The new law says you have to pay everything back.
FALSE. In Chapter 7 bankruptcy, debts are wiped out completely with the exception of certain taxes, child support/alimony, student loans and specially designated debts. In Chapter 13, the amount you repay is based on your disposable income (money left after your expenses are subtracted from your income) or liquidation analysis (property that we cannot exempt). In most situations, 100% repayment is not required.
9. It will be in the newspaper.
Usually FALSE. We suppose this could change, but this does not occur in the Richmond Area unless you are generally a news maker. As it stands, your bankruptcy filing will not be announced in a publication. However, it is public information, and anyone that wants to can go to the Bankruptcy Court and request your file. Additionally, the information is available on a Federal Bankruptcy database. To access it, you must have an account and pay to view it per page. Hearings related to your case are also posted on the court’s website for a brief time, however a person would have to know that they should look.
10. I hear “you can’t go bankruptcy on credit cards any more”.
FALSE. Credit cards are unsecured debts and will generally be discharged by bankruptcy. Credit cards and medical debts are the debt we discharge the most often.
11. After you take a credit counseling course you must wait 6 months before you can file a bankruptcy.
No, in fact it’s the opposite. One you take the credit counseling course and receive the certificate, the certificate is valid for 180 days. You must file bankruptcy within that 180 day period to use the credit counseling certificate. If you wait too long and the credit counseling certificate expires, you will have to take another credit counseling course and get a new certificate. Check with the US Trustee’s Website for authorized Credit Counseling courses. We provide clients with information about credit counseling providers that we find are cost-effective and consumer friendly. Under most circumstances, the credit counseling course is included in the cost of the Bankruptcy through us.
In short, there is no waiting requirement after completing credit counseling to file for bankruptcy.
12. If I file for bankruptcy I’m a failure.
Well then so are your family, friends, co-workers and the businesses you visit. Our clients are doctors, teachers, constructions workers, retail workers, hair stylists, police officers, bankers, rich, poor, blue collar, white collar…you get the idea. Plenty of famous and successful people filed for bankruptcy. For those struggling with the idea of filing, ask yourself whether you want a society of people in indentured servitude that die poor paying their debts, or people free from debt that can be productive and active members of society? Certainly we all want to pay our debts if we can. But sometimes it’s just too overwhelming.
13. There’s a secret way to make your creditors accept a fraction of the debt.
ABSOLUTELY FALSE, and don’t let wishful thinking make you believe promises made by debt settlement companies and others feeding off your sense of fear or guilt. It is true that oftentimes credit card companies will settle on stale debts. Sometimes they don’t. The settlement amounts vary from 5% of the debt to 99% of the debt. Moreover, creditors may (and often do) sue you. Unless you have a valid defense for the lawsuit, you may lose the case (see our information about defending collection lawsuits). They can get a judgment against you and garnish your wages, take your money in your bank account or put a lien on your property.
Assuming they do settle, what the creditors and debt settlement companies don’t tell you is this: the amount forgiven will be considered income to you and you may be taxed on the amount forgiven. It’s better to owe your credit card money than the IRS because you can discharge the credit card debt in bankruptcy much more easily, and debts discharged in Bankruptcy are deemed not income for purposes of your tax return. (see 26 US Code 108(a)(1))
14. I’ve hired a debt settlement firm to help me pay off all of my debts at a deep discount in 3 years or less and now I won’t have to file for bankruptcy.
See #13. It is common for our clients to be scammed by these companies. There is some promise to settle debts for pennies on the dollar. Creditors, however, do not have to settle with you at all; there is nothing special about the relationships between debt settlement companies and credit cards/debt collectors that guarantee settlements. Most of the time, the debt settlement companies will keep most of the money for themselves, leaving little for the actual settlement. They can’t do anything for you that you can’t already do for yourself – not pay your creditors then work out a settlement.
If you do decide to hire a debt settlement company, please be sure to check with the FTC and Attorney General office of the state the company is located. There are lots of warnings issued by governmental agencies regarding the dangers of hiring a debt settlement companies. We also see the United States Trustee that oversees bankruptcy sometimes go after debt settlement companies for scamming consumers. Also, many of the debt settlement companies are scams. They take your money and give you nothing in return.
15. My friend told me as long as I am going bankrupt I might as well max out my credit cards and use up what is left.
Accumulating debt with an anticipation of filing for bankruptcy may be considered fraud. Bankruptcy is for the unfortunate but honest debtor.
16. I should “leave one card out” of the bankruptcy.
ALL debts must be listed on the bankruptcy petition. Everyone you owe money to must be listed. This includes friends and families. Intentionally leaving a creditor out is grounds to deny you a Discharge, and may be an act of Bankruptcy fraud. Please note that Bankruptcy fraud is investigated by the FBI, and carries penalties up to and including jail and big fines.
17. “But my credit score will go down!”
See #5. If you are at serious risk of needing Bankruptcy, your credit score is already depressed. If you have defaulted on credit cards, home loans, car loans or student loans, they will already be reporting negatively on your credit report. Bankruptcy draws a line in the sand, and tells everyone that those debts are in the past. The credit reporting guidelines say that accounts that are included in a Bankruptcy are not scored, but all those charge-offs and delinquencies lower your score. A single missed payment can lower your score by as much as 150 points. But a Bankruptcy draws that line in the sand, and makes it go away.
18. I’ll never get credit again, or another, I won’t be able to get credit for 7 years.
After filing for bankruptcy, your debt-to-income ratio improves. This will help your credit score. Additionally, you cannot file again for 8 years (in case of Chapter 7) so you’re actually a “safe bet” for the creditors. Most of our clients report being able to get a secured credit card immediately after bankruptcy and an unsecured credit card with a modest credit limit within several months. This fluctuates with how banks extend credit. How long you have to wait to get a credit card will depend on your individual circumstances such as your income, work history and the banks’ lending practices at the time you apply.
19. Bankruptcy does not apply to certain creditors like Bank of America.
Bankruptcy applies to Bank of America as well as all other banks. Individual banks and persons do not get special passes. Read more about Chapter 7 and Chapter 13 to learn about which debts are discharged.
20. I will be making a better financial plan to suffer through and pay it back than to file for Bankruptcy.
Ask yourself, what will it take for me to get out of debt? Use this calculator to figure it out. Most people continue to make the minimum payments not realizing the amount of money it will actually take to get out of debt. Do not make the mistake of getting trapped in the cycle of making minimum payments – never being able to live debt free.
We suggest that you do a simple bit of math. Figure out your monthly living expense without paying on your debts. Figure out how much you have in income each month. Subtract the amount you have to spend from the amount you have for income (income-expenses). Take the total amount of your debt, and divide by 24. If the income-expenses number is not higher than your debt divided by 24, then when you try to pay it off, you will be forever paying mostly interest, and you will never get out.
If you will never be debt free, how can you ever get ahead?
Special thanks to Jeena Cho, of the JC Law Group, in San Francisco.
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Krumbein Consumer Legal Services, Inc.
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This is a thorough and helpful discussion of many issues. I’d like to provide people who are heavily in debt a little more assurance than you do about their employment situation. Debtors frequently ask whether an employer will take any sort of action against them because they filed bankruptcy. In Central Florida, I’ve never observed an employer discriminating against an employee because the employee filed bankruptcy. I do remember an employee at the Naval Training Center (shut down during the 1990′s) who filed bankruptcy in order to discharge her debts so she’d wouldn’t be disqualified from being rehired by the federal government because of past due bills (which arose from the layoff).