Bankruptcy Myths Busted
Bankruptcy and Future Credit Myths:
Myth Bankruptcy ruins your credit for 10 years (the elephant in the room).
Busted: Bankruptcy only has a meaningful impact on your credit score for 2-3 years. Like most credit report entries, the older the entry, the less impact it has. Now, it is true that bankruptcy is reported on your credit for 10 years, but it doesn’t impact your credit for all 10 years.
Myth If I file bankruptcy, I will never be able to buy a house with a mortgage.
Busted: Current FHA mortgage guidelines allow a debtor to receive a mortgage only 2 years after her bankruptcy is discharged. You can buy a house after bankruptcy; the bankruptcy won’t be an impediment.
Myth If I file bankruptcy, I will never be able to finance or lease a car.
Busted: You can finance a car during bankruptcy if you wanted (that program is called redemption). I have car dealers lined up chomping at the bit to finance my clients’ car purchase the day after their bankruptcy is discharged.
Myth I can’t refinance my home after bankruptcy.
Busted: The mortgage banks want you to believe this myth, but it is not true. No law prevents a mortgage refinance after bankruptcy and you can generally refinance as soon as a year after bankruptcy.
Myths Related to Qualifying for Bankruptcy
Myth You must be behind on bills to file bankruptcy.
Busted: Your payment status on your bills has nothing to do with your eligibility to file bankruptcy. Although many clients are behind on their bills when the decide to file bankruptcy (due to denial), it is not necessary.
Myth There is a minimum amount of debt you must have before you can file bankruptcy.
Busted: Legally, bankruptcy law does not set a minimum amount of debt you must have to file bankruptcy. At Personal Touch Bankruptcy, we use a formula to determine whether bankruptcy makes sense. That formula is [total unsecured debt / gross annual income] * 100. If the result is more than 30, you need a bankruptcy.
Myth You must be broke to file bankruptcy.
Busted: Most people who file bankruptcy are employed, middle class individuals and families. The reason for the bankruptcy is usually a temporary financial set back such as a job loss or major, unexpected expense.
Myth I earn too much money to file bankruptcy.
Busted: You might make too much money to file chapter 7 bankruptcy, but that doesn’t mean bankruptcy isn’t the best option. In reality, most people that want to file chapter 7 bankruptcy, can do so. You can only do that which is in your power to do.
Myth I don’t earn enough money to file bankruptcy.
Busted: In the short run, it may be wise to hold off on filing bankruptcy until your income becomes more stable, but there is no minimum income requirement to file bankruptcy. I have filed bankruptcy for clients living on social security or whose income is solely unemployment benefits.
Myths Related to Debts Eliminated in Bankruptcy.
Myth Medical bills cannot be discharged in bankruptcy?
Busted: Medical bills are unsecured debts no different than credit cards and are eliminated in bankruptcy. Not sure how this myth originated given that there is another myth that a debtor can file a medical bankruptcy.
Myth Payday loans cannot be discharged in bankruptcy?
Busted: Despite the illegal collection practices of payday loan companies, payday loans are discharged in bankruptcy.
Myth Tax debt cannot be discharged in bankruptcy?
Busted: Generally, income tax debt that is more than 3 years old can be discharged in bankruptcy. There are other requirements to eliminate tax debt, but certain tax debts can be discharged in bankruptcy.
Myth I can file bankruptcy on some debts, and not others?
Busted: Bankruptcy law requires that you disclose all debts. A debtor cannot choose to include some debts and not others.
Myths Concerning the Consequences of Bankruptcy
Myth I will lose my job if I file bankruptcy.
Busted: Bankruptcy law specifically forbids discriminating against employees who have filed bankruptcy, 11 U.S.C. 525. An employer cannot fire you for filing bankruptcy. As a practical matter, the bankruptcy actually cures the risk that concerns employers. An employee who has no debt and can live within their means is a far better employee and safer bet than someone who is distracted by personal financial troubles, owes a lot of money, and isn’t doing anything about it.
Myth I won’t be able to get a job if I file bankruptcy.
Busted: As a practical matter, the bankruptcy actually cures the risk that concerns employers. An employee who has no debt and can live within their means is a far better employee and safer bet than someone who is distracted by personal financial troubles, owes a lot of money, and isn’t doing anything about it. However, the bankruptcy anti-discrimination law regarding hiring only applies to federal hiring.
Myth I will lose everything, including my retirement account, if I file bankruptcy.
Busted: Bankruptcy does not exist to make you destitute, bankruptcy wants you to have a fresh start and be contributing member of society (e.g. a consumer). Each state and federal law provides for asset exemptions. Exemptions are laws that allow you to keep all or nearly all your property and possession even though you are filing bankruptcy. In reality, most people lose nothing or very little when they file bankruptcy.
Myth Everyone will know I filed bankruptcy.
Busted: Shame is a self-inflicted wound. This myth is more about you than other people; so, get over yourself, no one cares. However, the reality is, your bankruptcy is not information that becomes readily available. Yes, bankruptcy is a matter of public record, but the bankruptcy court database is an off-web database. Google and other search engines can’t index that database. Few if any newspapers (those that still exist) do not waste precious page space on publishing bankruptcy notices.
Myth Filing Bankruptcy means you’re a failure.
Busted: Bankruptcy is a financial tool. Bankruptcy doesn’t make you a failure any more than a having a mortgage means you are successful. Failure is a state of mind.