Please don’t make assumptions about how Chapter 7 and Chapter 13 should work. Always seek legal advice from an experienced bankruptcy lawyer regarding your specific situation. When you need guidance and honest answers, call 602 Law Group. Ask us how our personal bankruptcy lawyer could help you.
Top 15 Bankruptcy Myths
1. Nothing Stops Creditors and Debt Collectors
“Bill collectors will still call and harass me, I just know it.”
Nope. Filing for bankruptcy stops debt collection and much more. The moment you file your petition, the automatic stay protects you. That stay prohibits debt collectors and creditors from contacting you. Instead, creditors must file proofs of claim and do exactly as the bankruptcy judge says. If a creditor violates the automatic stay, then you have legal remedies in bankruptcy law and in the Fair Debt Collection Practices Act.
2. Lose Everything in Bankruptcy
“The trustee will take everything that’s meaningful to me.”
Not true. Trustees don’t destroy peoples’ lives. The trustee’s job is to administer the bankruptcy estate according to law. You’ll choose exemptions in Chapter 7 to keep your exempt property (or cash equivalent).
Although bankruptcy will not eliminate most liens, it’s possible for you to keep your car or house as part of a Chapter 13 plan or Chapter 7 reaffirmation agreement. Truth is, by not filing bankruptcy, assets could be seized in a series of repossessions, foreclosures, and creditor lawsuits.
3. Liquidate Home to Pay Debts
“The trustee will sell my house.”
Sometimes, but not always. This depends upon the homeowner’s equity and the bankruptcy chapter. In Chapter 13, so long as you remain current with your plan payments, the lender cannot foreclose.
In Chapter 7, the lender may seek court permission to proceed with foreclosure. The lender applies the sale proceeds to the mortgage debt first. Second, any equity in the home belongs to you. And up to $150,000 in equity is exempt under Arizona’s homestead exemption!
Do you own your home free and clear? Assets are not sold in Chapter 13. In Chapter 7, the trustee may sell the home if worth over $150,000. You would be the first paid from the sale proceeds up to the exempt amount ($150,000). The trustee divides the remaining proceeds among creditors. There are other options, too. Talk to a lawyer.
4. Public Humiliation and Embarrassment
“The whole world will know I’m bankrupt.”
Bankruptcy filings are public record, but it requires authorized access to view federal court records. Unless you tell people (and they talk) or are a person of prominence in the community making bankruptcy a newsworthy event, no one should be the wiser. Be discreet and it will likely pass unnoticed. A debt problems attorney could tell you how common filing for bankruptcy actually is. It happens, people make mistakes.
5. End to Buying Goods and Services on Credit
“No one will extend credit to me ever again.”
False! Lots of people finance new homes and vehicles shortly after the bankruptcy discharge. New credit card offers start arriving. Bankruptcy does not stop anyone from borrowing or being extended credit after the discharge. Make sure you can make the payments and you’ll be fine going forward.
6. Ruined Credit Score
“My credit score will be destroyed forever.”
This is false. The bankruptcy will show on your credit report for seven years with Chapter 13 and 10 years with Chapter 7. Take small steps to improve creditworthiness. Read our tips for rebuilding credit scores. Having a budget and sticking to it will get you there. Be intentional about paying bills timely and in full. After the bankruptcy discharge, closely monitor your income-to-debt ratio. And avoid financing above 40% of your credit limit.
7. Only for Unemployed and Underemployed
“I can’t file bankruptcy, I have a full-time job.”
Untrue! No one has to be unemployed or underemployed to obtain a bankruptcy discharge. It’s possible to have a good-paying job and still not be able to pay monthly bills. In fact, with Chapter 13 you must be working to fund a three-year or five-year plan from disposable income.
The Chapter 7 Means Test doesn’t require unemployed or underemployed status either. Of course, a job loss, pay cut, or reduced hours could derail anyone. When debts exceed your ability to pay, bankruptcy opens the door to a fresh start with permanent debt relief. We recommend speaking with a Chapter 7 bankruptcy lawyer to see if you qualify and pass the means test.
8. Taxes Never Get Discharged
“I owe back taxes to the IRS from years ago and will be stuck with those.”
Maybe, maybe not. Some taxes must be repaid, true. But with income taxes due over three years ago, filing bankruptcy could be the best way to regain control of the situation. Specific requirements must be met before any taxes are determined dischargeable. A partial discharge is also possible, which is better than no relief at all.
9. Awful, Terrible Person
“Everyone will think I’m a terrible, awful human being.”
Nothing could be further from the truth. Bankruptcy provides judicial financial relief to anyone who qualifies – this is the fresh start everyone talks about. People file because they’ve lost jobs, been divorced, had health problems, or experienced some other personal crisis or tragedy. Seeking bankruptcy relief can be scary. It takes courage. But there’s nothing bad about asking for much-needed help.
10. Overly Complex, Difficult and Confusing
“Bankruptcy is too difficult and complicated for me to try.”
Bankruptcy requires focus and thoroughness, true. You can do this with our help. Most people do fine completing each form with their attorney’s guidance. Consulting a bankruptcy lawyer, discussing real-life alternatives, shifts the focus from personal financial crisis to strategic plan of action in no time.
Is an emergency petition necessary? We ensure everything is completed properly and submitted on time.
11. Manipulate the System
“I get to pick which debts to list in my bankruptcy.”
This is untrue and a very bad idea. Debtors don’t pick and choose which creditors should get paid and which ones shouldn’t. The same bankruptcy rules and laws apply to everyone, including the requirement of full and fair disclosure. Failure to fully disclose could get the case dismissed. And defrauding creditors could result in court-ordered sanctions. List all creditors, assets, income sources, dependents, and exemptions on your schedules.
12. Both Spouses Must File
“My spouse won’t file, so I can’t either.”
False. Each individual has the right to file bankruptcy. Spouses may choose to file jointly, individually, or one may file while the other spouse does not. Explore these options carefully. There are advantages to filing jointly or individually, depending upon the circumstances. Everyone’s situation is unique.
13. Divorce and Family Conflict
“Bankruptcy ruins marriages and causes divorce.”
Financial troubles sometimes cause family conflict, but blaming a rocky marriage on bankruptcy is misplaced. The process is meant to fix financial stresses, not worsen them. Bankruptcy is often the solution that helps restore marital harmony. Arriving at the decision to file may be difficult for spouses who already have trust issues. Stay focused on the hope of relief it offers. A discharge of debts can lift a huge weight off the marriage, allowing the relationship time to mend.
14. Once in a Lifetime
“I got my bankruptcy discharge years ago, so I can never file again.”
Wrong. In bankruptcy law, there is an important distinction between filing a petition and obtaining a discharge. You can file as often as you need to.
How often can you obtain a bankruptcy discharge? With a Chapter 7 discharge, wait eight years before another Chapter 7 discharge or four years for a Chapter 13 discharge. With a Chapter 13 discharge, wait two years for another Chapter 13 discharge or six years for a Chapter 7 discharge.
15. Christian Struggle
“As a Christian, it’s wrong to file bankruptcy.”
Is it? Did you know the elimination of debt through bankruptcy has biblical origins? Deuteronomy 15:1-2 MSG speaks directly to creditors:
At the end of every seventh year, cancel all debts. This is the procedure: Everyone who has lent money to a neighbor writes it off. You must not press your neighbor or his brother for payment: All-Debts-Are-Canceled — GOD says so.
Creditors who forgive debts are blessed by God for these merciful acts: “Believe me, God, your God, Will bless you in everything you do.” Deut. 15:18 MSG.
Truth is, most people we help struggle with debt day-in and day-out. They juggle the bills while working hard to shelter, feed, and clothe their children. Whatever your circumstances, filing for bankruptcy is not personal failure. On the contrary, it’s a big step toward regaining control of your life, eliminating unpayable debts, and getting both feet back on solid financial ground.