BANKRUPCY MYTHS

The following is just a quick run-down of some of the most common misconceptions about bankruptcy.

MYTH: The filing of the bankruptcy will stay on my credit report for up to 10 years.

FACT:  While technically a correct statement, this fact is terribly misleading. Creditors make decisions about lending based first and foremost on your credit score, not merely your credit report. The fact of the matter is that your credit score will be drastically better within 2 years of your bankruptcy discharge. Funny as it sounds, once your credit score has taken a severe nose-dive, the fastest way to improve your credit score is by obtaining a bankruptcy discharge.  The fact of the matter is you will be able to obtain a car loan the very next day after obtaining a bankruptcy discharge. As for a house mortgage, you should be able to get that within 3 years of your bankruptcy discharge.

MYTH: If I file for bankruptcy then everyone will know.

FACT: Unless your name is Donald Trump or the like, the only people that are going to know that you filed bankruptcy are your creditors and anyone who pulls up your credit report in the future.

MYTH: If I file for bankruptcy I will lose everything I own to the creditors.

FACT: The odds of you having to sacrifice any of your assets is very unlikely. The typical things that most people own at the time of the filing of a bankruptcy case are either exempt (meaning protected by the bankruptcy laws) or, in the eye of the chapter 7 trustee, have little value.  Retirement accounts for instance are protected regardless of amount.  A car very rarely has any equity that would interest a chapter 7 trustee. As for your home, in this day and age, most homes do not have any equity in them.  And in case your home does have substantial equity (and is not jointly owned with your spouse), then you should be able to file a chapter 13 bankruptcy and keep your home, regardless of its value.

MYTH: I have a large amount of credit card debt and I keep hearing that if I go with a debt consolidation company, they can settle all of my accounts and allow me to avoid bankruptcy.

FACT: There is a very high likelihood that you will still end up filing for bankruptcy after having paid the debt consolidation company thousands of dollars. A debt consolidation company will need you to pay them nearly half the total amount of money that you owe the credit card companies before they can start negotiating with the banks.  Since most people do not have thousands of dollars sitting in the bank they begin to send money to the debt consolidation on a monthly basis.  Problem is, at a rate of $500/month –for example- it might take you years to come up with one half of the total amount that you owe.  Meanwhile, the banks are not waiting.  They want their money now, not later. As a result, your credit gets ruined since the credit card companies report your accounts as delinquent to the credit bureaus.   Eventually, the accounts get charged off, and you end up getting sued. Good luck tracking down the debt consolidation company out of California that you hired and asking for your money back at that point.

MYTH: I will jeopardize my clearance or immigration status if I file bankruptcy.

FACT: Unless you have accumulated your debt because of a drug problem, gambling addiction, or the like, you will not lose your clearance because you filed for bankruptcy.  In fact, the filing of the bankruptcy will save you from losing your clearance.  You are however very likely to lose your clearance if you have a number of delinquent accounts, judgments, foreclosures, etc. and you are not doing anything to straighten out these issues.  At that point you will probably be advised by the security personnel that you “need to do something about this.” What they are really telling you: at this point, you need to file for bankruptcy since that is the only way to remove all these blemishes from your credit report.

Same goes for immigration status. Your green card or path to citizenship will not be affected by filing for bankruptcy. Nothing illegal about filing for bankruptcy, which is what INS is concerned with.

MYTH: Bankruptcy=failure.

FACT: I am not telling you that you should be thrilled at the prospect of having to file for bankruptcy, but the fact of the matter is that on average, about 1 million people each year file for bankruptcy in the United States. There are plenty of “successful people” that have filed for bankruptcy in their lives and some on more than one occasion. Bankruptcy has its roots in the Bible and more recently in the United States Constitution. It is perfectly legal and used by fortune 500 companies all the time.

MYTH: Bankruptcy cannot help me with income taxes owed to the IRS or to the state.

FACT: If you have old tax debt and the tax returns have been filed more or less on time for the years in question, then filing for bankruptcy may very well wipe out your tax liability.

MYTH: I filed and obtained a chapter 7 discharge a few years ago and although I need bankruptcy relief at this time, I read on the internet that I cannot file again until eight years have gone by.

FACT: Even if you cannot obtain another discharge for a number of years due to a prior chapter 7 discharge, you can always file a chapter 13 to stop a foreclosure, a garnishment, or a lawsuit.

MYTH: Filing for bankruptcy will somehow negatively impact my spouse who is not filing with me.

FACT: If you are living with your spouse at the time of your filing you will have to disclose his/her income. That is the extent of your spouse’s involvement.  Their name appears nowhere. If there is no joint debt that you are discharging, then you have nothing to worry about.