If you are considering filing a bankruptcy, perhaps you have been bombarded with false information from well-intentioned friends and family members. Here are some of the most persistent myths that we’d like to shatter:
Myth #1: IF YOU’RE MARRIED, BOTH YOU AND YOUR SPOUSE HAVE TO FILE FOR BANKRUPTCY
FALSE – In cases where both husband and wife have a lot of debt, it makes sense and saves money for both to file, but it is never a requirement. In fact, in many cases, only one spouse files, and if you don’t have any joint debt, your filing will have no direct impact on your spouse’s credit.
Myth #2: YOU MUST BE BEHIND IN YOUR BILLS OR BROKE TO FILE BANKRUPTCY
FALSE – If you are facing distress over your bills or see it coming down the road, do not wait until it is an emergency. With proper planning, you can avoid the stress of lawsuits, judgments and wage garnishments.
Myth #3: YOU SHOULD DO ANYTHING TO AVOID BANKRUPTCY INCLUDING CASHING IN 401K OR RETIREMENT FUNDS
FALSE – Retirement funds are as close to sacred money as you can get. The funds are protected and you will face taxes and penalties on retirement withdrawals by the IRS, if not repaid.
Myth #4: IF YOU FILE BANKRUPTCY, YOU MIGHT AS WELL MAX OUT YOUR CREDIT CARDS
FALSE – This bit of street knowledge could result in criminal charges against you. Maxing out those cards will create more problems in your bankruptcy filing and may be bad faith. Bankruptcy is meant for the honest debtor who is trying to get a fresh start.
Myth #5: YOU LOSE EVERYTHING YOU OWN IN BANKRUPTCY
FALSE – In most bankruptcy cases filed by individuals, the debtor is able to keep almost everything he owns. That’s because exemptions provide for assets that the debtor can keep and some assets, like pensions, are beyond the reach of bankruptcy trustees and creditors. Furthermore, a chapter 13 reorganization is specifically designed to enable you to keep your assets while paying as much debt as you can reasonably afford.
Myth #6: YOU CAN’T GET RID OF BACK TAXES IN BANKRUPTCY
FALSE – Certain federal, state and local taxes, inheritance taxes, and personal property taxes as well as overly burdensome interest and/or penalties can be mitigated under the bankruptcy laws. There are several qualifications that have to be met, but once these are met, relief is available.
Myth #7: I WILL LOSE MY HOME IF I FILE BANKRUPTCY
FALSE – If you have a mortgage and can afford to pay that mortgage, there is no reason the bank will try to take your home. If you have equity in your home in excess of the mortgage, each state has different levels of protection for homes. California’s state exemption is $75,000 of equity per homeowner ($100,000 of equity for married couples). This is measured in addition to your mortgage balances when compared to your home’s value.
Myth #8: EVERYONE WILL KNOW YOU HAVE FILED FOR BANKRUPTCY
FALSE – Unless you’re a celebrity or a major corporation and the filing is picked up by the media, it is likely that the only people who will know about a filing are your creditors and the people who you tell. While it’s true that your bankruptcy is a matter of public record, so many people have filed—about 2 million during one year alone—unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed.
Myth #9: YOU WILL NEVER GET CREDIT AGAIN
FALSE – eople in Chapter 13 can borrow money during the case; people who’ve filed Chapter 7 get inundated with offers for new credit cards and car loans after they get their discharge. This is not credit at the best rates, but credit is available. Filing bankruptcy gets rid of debt, which puts you in a position to handle more credit, and this makes you look more attractive to would-be lenders. At first, lenders will want more money down and will want to charge you higher interest rates. However, over time, if you are careful, and keep your job, and start saving money, and pay your bills, and do things that will put good marks on your credit report, your credit scores will get higher, and the terms you can get will improve. Many clients can qualify for mortgages, at regular rates, two years after their discharge.
Myth #10: BANKRUPTCY REPRESENTS PERSONAL OR MORAL FAILURE
FALSE – More than 90% of bankruptcy filings are traceable to job loss; illness or divorce which are factors largely out of anyone’s control. Bankruptcy is a safety value to prevent individuals from being buried by debts they can never repay. The vast, overwhelming majority of the people who file bankruptcy are good, honest, hard-working people, just like you and me, who file as a last resort. They have spent months or years struggling to pay the bills left over from some life-changing experience, such as a serious illness, the loss of a job, separation or divorce, a failed business venture, or some family emergency.
Medical Bills are a Leading Cause for Bankruptcy.
A recent study by Professor Elizabeth Warren of Harvard Law School found that over half of all bankruptcies are related to illness, and 75% of those people who end up filing because of medical bills have health insurance.
Is filing for bankruptcy ethical?
Moreover, far from being “immoral,” the modern bankruptcy laws are morally and ethically based on sound Biblical principals which demand the routine cancellation of excessive debt — indeed, the Bible places most of the responsibility for excessive debt on creditors who take advantage of debtors with outrageous interest rates and predatory terms. It is the financial enslavement of one’s brother with excessive debt and interest in personal gain, not the release of debts in bankruptcy, that is condemned by the Bible.