12 myths about bankruptcy
Like most big, bad scary things, bankruptcy has
a reputation based on a few tidbits of truth and lots of embellishment.
And like most creepy crawlies, it's not nearly as frightening once
you know the truth.
With a mind toward declawing the monster, here are
a dozen misconceptions about bankruptcy:
1. Everyone will know I've
filed for bankruptcy. Unless you're a prominent person or
a major corporation and the filing is picked up by the media, the
chances are very good that the only people who will know about a
filing are your creditors. While it's true that bankruptcy is a
public legal proceeding, the numbers of people filing are so massive,
very few publications have the space, the manpower or the inclination
to run all of them.
2. All debts are wiped out
in Chapter 7 bankruptcy. You wish. Certain types of debts
cannot be discharged, or erased. They include child support and
alimony, student loans and debts incurred as the result of fraud.
It's also very unlikely that a judge will discharge legal settlements
you've been assessed, such as money you've been ordered to pay to
someone who sued you.
3. I'll lose everything I have. This
is the misconception that keeps people who really should file for
bankruptcy from doing it, says Chris Viale, chief operating officer
of Massachusetts-based Cambridge Credit Counseling Corp.
"They think the government will sell everything
they have and they'll have to start over in a cardboard box,"
While the bankruptcy laws vary from state to state,
every state has exemptions that protect certain kinds of assets,
such as your house, your car (up to a certain value), money in qualified
retirement plans, household goods and clothing.
"For most people, they'll pass through
a bankruptcy case and keep everything they have," says John
Hargrave, a bankruptcy trustee in New Jersey. If you have a mortgage
or a car loan, you can keep those as long as you keep making the
payments (like the rest of us).
4. I'll never get credit again.
Quite the contrary. It won't be long before
you're getting credit card offers again. They'll just be from subprime
lenders that will charge very high interest rates. "There are
innumerable companies that will provide credit to you," says
California bankruptcy attorney and trustee Howard Ehrenberg. "I
don't advise any of my clients to run out and run up the bills again,
but if someone does need an automobile, they can go and will be
able to get credit. You don't have to go underground or something
to get money."
However, if you're planning to
buy a house or a car, you might want to do that before you file.
Those loans will be tough to get and the higher interest rate on
such a large purchase would make a significant impact on your payments.
Also, if you have a credit card with a zero balance on the day you
file for bankruptcy, you don't have to list it as a creditor since
you don't owe any money on it. That means, you might be able to
keep that card even after the bankruptcy.
5. If you're married, both spouses have
to file for bankruptcy. Not necessarily.
"It's not uncommon for one spouse to have a significant amount
of debt in their name only," Hargrave says. However, if spouses
have debts they want to discharge that they're both liable for,
they should file together. Otherwise, the creditor will simply demand
payment for the entire amount from the spouse who didn't file.
6. It's really hard to file
for bankruptcy. It's really not. You don't even technically
need an attorney. However, it's not recommended to go through the
procedure without one.
7. Only deadbeats file for
bankruptcy. Most people file for bankruptcy after a life-changing
experience, such as a divorce, the loss of a job or a serious illness.
They've struggled to pay their bills for months and just keep falling
8. I don't want to include
certain creditors in my filing because it's important to me to pay
them back someday and if the debt is discharged, I can't ever repay
them. Bless you for even thinking about such a thing. You're
no longer obligated to repay them, but you always have that opportunity.
If your conscience won't let you sleep nights because you didn't
pay your debts, there's nothing in the bankruptcy code that prevents
you from doing that once you're back on your feet. But bankruptcy
is an all-or-nothing deal, so you have to include all your creditors
in the petition.
9. Filing for bankruptcy will
improve my credit rating because all those debts will be gone. That
sounds like an ad for a bankruptcy lawyer trolling for clients.
Filing for bankruptcy is the worst 'negative' you can have on your
credit report. Unlike other negatives, which stay on your report
for seven years, bankruptcy can be there for 10 years.
10. You can't get rid of back
taxes through bankruptcy. Generally speaking, this is true.
However, there is such a thing as tax bankruptcy, says tax
educator Eva Rosenberg, known on the Web as Tax Mama. To get a shot
at it, you have to file all your returns and the taxes owed need
to be at least three years old.
11. You can only file for
bankruptcy once. The truth is, you can only file for Chapter
7 bankruptcy once every six years, Hargrave says.
For Chapter 13 reorganization, you can file more often than
that, but you can't have more than one case open at the same time,
Of course, that doesn't make it a good idea.
"Multiple bankruptcies are really bad,"
Rosenberg says. "Many people get into the habit of once they've
done it, it becomes a way of life. This is not good for your karma."
Or your credit rating.
12. I can max out all my credit
cards, file for bankruptcy, and never pay for the things I bought.
That's called fraud and bankruptcy judges can get really cranky
about it. The trustee in your case will review all your purchases
right before your filing. He knows what to look for.