Bankruptcy: Myth or Truth?

bankruptcy myths

Myths and misinformation swirl around bankruptcy. 

And that information is no more real than the elephant-dragon-peacock in the picture.

Creditors want to confuse or frighten.

Friends may have bad information or correctly recall bankruptcy information that’s now outdated.

The internet is full of half truths, propaganda, and misunderstandings.

Here are 10 myths about filing bankruptcy.

Each and every one of them is wrong.

Myth: Bankruptcy relief is no longer available

Almost all of the relief  available through bankruptcy before the changes to the law in 2005 survives in today’s bankruptcy code.

It is a little more involved than before “reform” and somewhat more expensive, but it still works.

Myth: You can’t file bankruptcy if you have a job

The new “means test” is supposed to divert some filers who make more than the median income for households of their size in their state of residence to Chapter 13. The only way to fund a Chapter 13 plan is to HAVE a job.

So, this is utterly untrue. More on the means test.

Myth: Medical bills can’t be discharged

A variation on this myth is that “you can’t discharge credit card debt in bankruptcy.”  This has the sound of the law-as-described-by-bill-collectors.

Almost all unsecured contract debt, like credit cards, personal loans, and medical bills, remain dischargeable in bankruptcy. More on the bankruptcy discharge.

Myth: Chapter 13 plans require repayment in full 

Chapter 13 plans range from plans that pay general unsecured creditors nothing to plans that pay 100%, with every variation calculable in between.

How much you must pay in 13 is driven by the interplay between your disposable income, the value of your non exempt assets, and the total of priority debts you have. More on Chapter 13.

Myth: bankruptcy keeps you from credit for 10 years

Nonsense.

People in Chapter 13 can borrow money during the case; people who’ve filed Chapter 7 get credit card offers soon after they get their discharge. This is not credit at the best rates, but credit is available.

The myth probably got its start in the fact that the Fair Credit Reporting Act allows the reporting of a bankruptcy filing for 10 years. Credit after bankruptcy

Myth: You lose everything you own in bankruptcy

Nearly all bankruptcy cases filed by individuals are “no asset” cases in which the debtor keeps everything he owns. That’s because exemptions shelter assets that the debtor can keep.

Some assets, like pensions, are simply beyond the reach of bankruptcy trustees and creditors. More about how exemptions work.

Myth: Bankruptcy represents personal failure

More than 90% of bankruptcy filings are traceable to job loss; illness; or divorce, factors largely out of anyone’s control.

Bankruptcy is a safety value to prevent individuals from being buried by debts they can never repay. Look at the profile of the typical filer.

Myth: Bankruptcy costs our society too much

Credit card issuers are wildly profitable despite the small percentage of loans discharged in bankruptcy.

Our economy has benefited by the purchasing power facilitated by credit.  The pricing of credit takes into account that not everyone will be able to repay.

Tom Friedman says bankruptcy essential in the global economy.

Myth: There is a minimum amount of debt required 

Bankruptcy law does not set any minimum amount of debt necessary to file.

If the debt appears to be beyond your ability to pay, you can elect to file bankruptcy if it represents a smart choice in your personal and financial situation. Considering bankruptcy.

Myth: Married couples must file together

Spouses may file a joint case; they do not have to file together.

If only one spouse files, careful attention is required to understand what property will be treated as property of the bankruptcy estate. More on spouses & bankruptcy.

An experienced bankruptcy lawyer can evaluate your financial situation and talk about your options, in and out of bankruptcy.

Read more

How bankruptcy works

What happens to my house?

Find a good bankruptcy lawyer to talk to 

Image of a mythical creature courtesy of Pixabay.

About the Author
 
 
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.