Bankruptcy is often misunderstood, leading many to shy away from this valuable financial tool out of fear and confusion. In reality, bankruptcy can provide a fresh start for individuals overwhelmed by debt. Unfortunately, myths about bankruptcy persist, keeping people from seeking the relief they need. In this post, we’ll debunk six common misconceptions, offering clarity on the truth about filing for bankruptcy and how it impacts your financial future. Whether you’re considering bankruptcy or simply want to better understand the process, this information can help you make informed decisions.
1. Everyone will know I filed for bankruptcy.
FALSE. While bankruptcy is a public legal proceeding, so many people file for bankruptcy that few publications have the space, manpower, or inclination to run all of them. So most likely, only your creditors will know about your filing. Your reputation around your family, friends, and social circles will be preserved.
However, be aware that bankruptcy cases are still public records, so anyone can go to the local bankruptcy clerk’s office and find the case if they have the correct information.
2. All debts are wiped out in Chapter 7 bankruptcy.
FALSE. Certain kinds of debts cannot be discharged or erased, including child support and alimony, most student debt, taxes, and loans incurred as a result of fraud. Additionally, it’s unlikely that the judge will also discharge you from legal settlements.
To understand what kinds of debts can be forgiven, it’s recommended to consult with an attorney.
3. You’ll lose everything you have.
FALSE. Every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), retirement plans, and household goods. However, you must meet the requirements for the specific chapter you are filing for bankruptcy under. These requirements usually involve being current on all payments and having a certain amount of home equity.
However, trustees and creditors won’t bother selling items that aren’t worth much, or that would be too much of a hassle. For example, if you owe money on a second car but the amount left on the loan is less than the storage, sales, and lender fees, the trustee (that is, the person who is in charge of selling your items to pay back your debts) will more likely abandon it. However, if you owe money on a luxury car, the trustee will be able to recoup all the extra fees from its sale.
Finally, if the filer wants to keep a particular property, they can negotiate with the trustee to buy the property at a discounted rate, especially if it would save the filer the work of storing it and finding a buyer for it.
As a rule of thumb, if you need an item to have a happy, productive life in society, the item is most likely covered under an exception, and you will be able to keep it.
4. I’ll never get credit again.
FALSE. While your credit score will be severely impacted, you will receive credit offers again. However, these new offers will often be from subprime lenders, charge very high interest rates, or both. Bear in mind, you cannot apply for new lines of credit – like credit cards – while the bankruptcy proceedings are in progress without court approval, and it can take several months and up to five years, depending on what kind of bankruptcy chapter you are using.
The best move to rebuild credit after bankruptcy is to apply for a secured credit card, which requires the consumer to put a security cash deposit roughly equal to the card’s limit. With responsible behavior, many holders can then upgrade to a non-secured card and get the deposit returned, all the while rebuilding their lost credit.
Finally, while a bankruptcy stays in the credit report between seven and ten years, its relevancy diminishes with time and with evidence of good, responsible behavior. Be patient, building credit back up is a years-long endeavor for which there is no shortcut.
5. My spouse will have to file for bankruptcy too.
DEPENDS. Spouses can file individually for bankruptcy if the loan is in their name only. (EX: if they have separate credit cards). However, if both spouses are liable for the debt, they will want to file together, otherwise, the creditor will simply demand the entire payment from the spouse who didn’t file.
6. It’s really hard to file for bankruptcy
TECHNICALLY FALSE. To file for bankruptcy, you only need to gather and file the appropriate documents, take the credit counseling course, and pay the appropriate filing fee (usually less than $500). After that, you will be assigned a trustee who has to verify your information, and must take another course (the debtor’s course) and meet with your creditors in a 341 meeting. After all that, you will receive your discharge in 2 or 3 months.
However, bankruptcy forms vary wildly, even within the state. For example, Florida has specific forms for the Northern, Middle, and Southern Districts; in addition to Federal forms.
For this reason, we highly recommend you consult with a bankruptcy and debt relief lawyer, who can help you navigate this long procedure, as well as find advantages people without the correct expertise wouldn’t realize they had.
The office of Jon L. Martin is proud to have served Palm City and surrounding cities for 20 years, and we have the expertise to help you navigate this stressful time. Give us a call at 772-834-0057 or fill out the contact information in this page for a free consultation.
