Myths About Bankruptcy

Only irresponsible people file for bankruptcy.

This could not be further from the truth. Financial crisis can happen to anyone. People from all walks of life, of every profession and every background have and will suffer from financial difficulties, whether it is their fault or not. Bankruptcy is one way of dealing with financial hardships and it has been utilized by many people you know and respect, including Henry Ford, Milton Hershey, Donald Trump, Walt Disney, Thomas Jefferson, etc. Choosing to file bankruptcy is a decision to do something about your financial problems. Doing nothing is the irresponsible course of action - or inaction.

I cannot change your view of what is morally right or wrong and don't really have any desire to try. However, I know that many people who believe this tend to point to Judeo-Christian teachings in support of their view. In Hebrew tradition, creditors were obligated to forgive all debts owed to them after seven years. In early Christian history, it was immoral to make money from money - charging interest for the lending of money was considered usurious. The law even recognized usury as the charging of unacceptably high interest for money lending. The protections that these notions offered is largely absent since deregulation of the banking industry. For many people, bankruptcy is the only remaining viable legal recourse from predatory lending practices. Before perpetuating the immorality argument against bankruptcy, at least consider how the credit industry has stripped any sense of moral decency from their practices.

This is in the context of a Chapter 7 Liquidation bankruptcy. It is not true. Chapter 7 does involve a liquidation of assets to the extent that the value of one's assets exceeds certain very generous amounts. One's assets are exempt from liquidation in the vast majority of cases, which allows most individuals in Chapter 7 to keep everything they own. In order to protect your assets to fullest extent of the law, it is important to consult with a qualified attorney and to accurately disclose all of your property and its value. The best way to protect your assets is to be honest about them from the outset.

This is not true. For many former clients I wish I could say that it is true, however. The truth is, many people's credit score will be better than it was prior to filing for bankruptcy within 18 months after discharge. This is both good and bad.

Creditors know that after a discharge in Chapter 7, you cannot file for Chapter 7 again for eight years. This means that in many cases they are actually more willing to extend credit after a bankruptcy than they were before it. However, creditors also rely on your need for credit to recoup their losses. They will try to get you back into debt after a bankruptcy to make up for the loss they incurred when you discharged them. Be very careful. I actually advise my clients to ignore or shred all credit card offers that will inevitably fill their mailbox following a bankruptcy for this reason.

At the end of your bankruptcy, you will have a debt-free fresh start. Why spoil that by immediately incurring new debt? It is a trap that you do not want to fall into. Trust me. The goal of your bankruptcy is to eliminate that stress from your life once and for all. During your case, you should be actively trying everything in your power to get your cash flow under control so that you are no longer in need of credit to survive. In my professional opinion, any attorney that does not point this out and give you the resources needed to turn your life around is remiss in their duties. It is one thing to file your case and represent you during a bankruptcy. It is of little help, however, if it does not resolve the underlying problem.

As for home ownership and car purchases, you can and will own these things again if you choose following a bankruptcy. It may take some time and a real effort on your part, but doesn't every accomplishment?

Let us be perfectly clear on this point - that is tantamount to theft. I have heard various versions of this myth for years. I have yet to meet the person who actually did it. If this is true, then that individual is either lying to you when bragging about how they "beat the system" or they may have committed a federal crime when they did it. Bankruptcy fraud is very serious matter. Any charges for non-consumable goods or services incurred shortly before a bankruptcy filing may be declared non-dischargeable in the bankruptcy. This is only fair, isn't it? Do not believe everything you hear and certainly do not act in reliance of everything you hear.

Again, not true. There is no limit to the number of times you can seek bankruptcy protection. There are, however, limits on how frequently you can do it. The mandatory time period between filings depends on the Chapter of bankruptcy you have filed in the past and the chapter you are contemplating. I recommend that you seek a qualified attorney for an explanation of these requirements if they are of concern to you.

Like many myths, this one is partially based in truth. What makes it a myth here is the word "most". Some debts are non-dischargeable. These include domestic support obligations, some tax obligations, most student loans, and some other types of debts. A qualified attorney can advise you of which debts you can expect to discharge in bankruptcy and which of your specific debts you cannot.

I include this here because it seems to be a common misconception about bankruptcy that you can somehow pick and choose which creditors will be "included".

All debts known to you at the time of filing must be listed in your bankruptcy petition. Whether or not they are discharged depends on several variables, only some of which are in your control. You can reaffirm certain obligations in order to continue paying them. In reaffirmation the debt is deemed not to be discharged. You can also voluntarily pay creditors that have been discharged by the court in your bankruptcy. These considerations are somewhat complicated and you should never agree to pay any creditor during a bankruptcy without consulting your attorney on the matter. Doing so can have legal consequences that may not be obvious to you.

First of all, this is not really true in most cases. Secondly, if this is a concern to you, then chances are you are not ready for bankruptcy as a solution to your financial problem. Most people who will significantly benefit from a bankruptcy already have credit problems. If your credit score is still perfect, then you are probably managing your debts just fine without any need for a bankruptcy solution. You may be prematurely considering bankruptcy as an option. While I believe that it is never too early to consider all of your options, I will point out that if this is your biggest concern then the situation is not bad enough yet.

On another point, in my seminars I refer to credit scores as "debt scores". What is your credit score predominantly used for? To determine your credit-worthiness, right? To incur DEBT. Most people care about their credit score because having a good one makes it easier and cheaper to do what? Incur debt. Do you want more debt? I didn't think so. When you are more concerned about your financial health than a number that will help you worsen it, let me know and I will help you reach your goals.