People may talk about bankruptcy without consulting a qualified attorney. Consequently, there are many myths and misconceptions the general public has about bankruptcy. We will attempt to clarify or dispel such myths or misconceptions here.
1. All debts are wiped out in Chapter 7 bankruptcy. 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.
2. I will lose everything. This is a misconception that keeps people who should file for bankruptcy from doing it. While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house (up to a certain value), your car (up to a certain value), and money in qualified retirement plans, household goods and clothing, and tax refunds, up to a certain amount.
3. I’ll never get credit again. Not true. Before long you will be getting credit card offers again. They may be from lenders that will charge very high interest rates. We don’t advise our clients to run up a lot of bills, but if you need to get an automobile you will be able to get credit. Also, if you have a credit card with a zero balance on the day you file for bankruptcy, you do not have to list it as a creditor because you do not owe any money on it. That means you might be able to keep that card even after the bankruptcy.
4. If you’re married, both spouses have to file for bankruptcy. Not necessarily. It often happens that one spouse has a significant amount of debt in his or her name only. However, if spouses have debts they want to discharge that they are both liable for, they should file for bankruptcy together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who did not file.
5. It’s very difficult to file for bankruptcy. It is not difficult. But it is recommended that you hire a lawyer to make sure that its done right.
6. Only “deadbeats” file for bankruptcy. Most people file for bankruptcy after a life-changing experience, such as a loss of job, reduction in overtime, a serious illness, or a divorce. They have struggled to pay their bills for months and just keep falling further behind.
7. I should not 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. It’s a commendable sentiment. After a bankruptcy, you are no longer obligated to repay them. Bankruptcy is an all-or-nothing deal, so you must include all your creditors in the petition. But nothing stops you from voluntarily paying a friend or relative after the discharge.
8. You can’t get rid of back taxes through bankruptcy. Generally speaking, this is true. However, there are exceptions. To have a chance of success, you have to file all your returns and the taxes owed need to be at least three years old.
9. You can only file for bankruptcy once. The truth is, you can only file for Chapter 7 bankruptcy once every eight years. For Chapter 13 reorganization, you can file more often than that, but you cannot have more than one case going at one time. Still, it’s not a good idea to make filing bankruptcy a habit.
10. I can max out all my credit cards, file for bankruptcy, and never pay for the things I bought. This is not a good idea. It’s called fraud and bankruptcy judges tend to frown upon this conduct. Creditors have a right to object to the dischargeability of their debt based on fraud.
11. Everyone will know I’ve filed for bankruptcy. Unless you’re famous or a prominent person, and the filing is picked up by the media, probably the only people who will know about a filing are your creditors. While it’s true that bankruptcy is a public legal proceeding, there are so many people who file, publications do not have the space, or inclination to publish all of them.
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