Most people have a lot of misconceptions and misunderstandings about bankruptcy law.
This includes the benefits of bankruptcy as well as the downsides and costs.
- 1 What Are Some of the Bankruptcy Myths?
- 1.1 A. Bankruptcy Relief is No Longer Available
- 1.2 B. Having A Bankruptcy Consultation Will Obligate Me To File Bankruptcy
- 1.3 C. If I file bankruptcy I will have to repay some or all of my debts
- 1.4 D. I will lose all my property if I file bankruptcy
- 1.5 E. Bankruptcy will Destroy My Credit
- 1.6 F. You Must Be Behind (In Default) On Your Debt Payments To File Bankruptcy
- 1.7 G. If your income is above the median income for your area, you cannot qualify for Chapter 7 bankruptcy
- 1.8 H. You Will Lose All Your Assets if You File Bankruptcy
- 1.9 I. I Should Feel Guilty About Filing For Bankruptcy
- 1.10 J. It’s OK for me to repay my relatives and friends prior to filing bankruptcy.
- 1.11 K. I cannot get rid of taxes in bankruptcy, so why bother?
What Are Some of the Bankruptcy Myths?
A. Bankruptcy Relief is No Longer Available
False. The new bankruptcy laws have made the process more burdensome in some cases, and altered eligibility for certain people, but for most people, if they were eligible before, then they are likely eligible now for bankruptcy relief.
B. Having A Bankruptcy Consultation Will Obligate Me To File Bankruptcy
False. This is one of my favorites. A bankruptcy attorney cannot force you to file bankruptcy without your consent (nor would we anyway). The consultation is to provide you with information. Obtaining this information helps YOU to make decisions by giving you your options and the benefits and costs of each. See my article on bankruptcy consultations for more on this.
C. If I file bankruptcy I will have to repay some or all of my debts
This is false in most cases. For individuals, Chapter 7 is still available for most people, as set forth above. Sometimes if the analysis shows too much income on either the means test or current budget, you may have to do a repayment plan in a Chapter 13, but usually not. Want to learn your options? Have a no-obligation consult with an experienced bankruptcy attorney.
D. I will lose all my property if I file bankruptcy
False. Whether you get to keep your property depends on the value (or amount of equity) in any particular item of property and what applicable exemptions you have available to protect the value in that asset. In the vast majority of cases in California, you will be able to keep your property. Of course, analysis by a bankruptcy professional is necessary to accurately make that determination.
E. Bankruptcy will Destroy My Credit
False. It is true that bankruptcy can be reported on your credit report for up to 10 years after your case is filed, but the actual effect of bankruptcy on your credit score varies depending on what your score was before you filed bankruptcy, and it is temporary because you can start rebuilding your credit immediately after filing your case.
In many cases, especially for people who have very low credit scores before filing bankruptcy, their credit scores go up shortly after filing bankruptcy, as long as they maintain payments on obligations thereafter. Plan on it returning to the 725-750 range after about two years if you’re busy paying your bills on time post-bankruptcy.
F. You Must Be Behind (In Default) On Your Debt Payments To File Bankruptcy
False. There is no requirement that you be delinquent on any payments to file bankruptcy. If you are in a situation where you will not be able to repay all your debts given your current or anticipated income, bankruptcy is an option that should be explored. Many file bankruptcy when current with payments. In fact, doing so prevents problems with creditor collection actions prior to filing bankruptcy.
G. If your income is above the median income for your area, you cannot qualify for Chapter 7 bankruptcy
False. The median income threshold is merely the trigger for whether you actually TAKE the means test. You can still pass the means test with income above the median.
H. You Will Lose All Your Assets if You File Bankruptcy
False. If you file under the correct chapter for your situation, you should never lose ANY assets unexpectedly or involuntarily. See More
I. I Should Feel Guilty About Filing For Bankruptcy
Well, that’s a personal decision of course, but considering the great people who have filed for bankruptcy, and the state purpose of the bankruptcy laws, there’s no more reason to feel guilty about filing bankruptcy than there is for receiving social security. See my article on feeling guilty about bankruptcy for some more thoughts.
J. It’s OK for me to repay my relatives and friends prior to filing bankruptcy.
False. Depending on which bankruptcy chapter is filed, doing so within a certain time period prior to filing can result in those friends and relatives being sued by a bankruptcy trustee to recover the money you repaid.
K. I cannot get rid of taxes in bankruptcy, so why bother?
False. Taxes, including income tax, sales taxes, unemployment (EDD) overpayments, excise taxes, and more are dischargeable if certain criteria are met. See more about tax dischargeability.
Image courtesy of Amit Patel