May 19, 2011

Common Bankruptcy Misconceptions

Posted in Bankruptcy tagged at 11:20 am by demetriagraves

One of the most common things I find when working with clients who are considering bankruptcy is that there are many common misconceptions about bankruptcy that can make it harder for people to consider bankruptcy as a viable option. In this article I’d like to bring to light these most common misconceptions about bankruptcy.

MISCONCEPTION #1: Bankruptcy is dishonest. Not true. Most people honestly want to pay their bills, but sometimes things happen that make it impossible. These things include an unexpected lawsuit, judgment or income tax bill, medical bills and more. Bankruptcy is a legal right that is provided for in the United States Constitution. Bankruptcy is a right that protects honest people from harassment, lawsuits, wage garnishment and other creditor actions. Bankruptcy allows a fresh start.

Many experts trace the roots of our bankruptcy laws to the Bible, which says:
At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1–2)

There are many famous people who have declared bankruptcy like Jerry Lewis, Kim Basinger, David Bowie, Anita Bryant, Natalie Cole, Mickey Rooney, Walt Disney, Tammy Wynette, Mick Fleetwood of Fleetwood Mac, Zsa Zsa Gabor, Isaac Hayes, Don Johnson, Abraham Lincoln, Donald Trump, MC Hammer, Marvin Gaye, Archie Griffin, Dorothy Hamill, Milton Hershey, Perez Hilton, Ronald Isley, LaToya Jackson, Thomas Jefferson, P.T. Barnum, Willie Nelson, Burt Reynolds, Larry King, Cyndi Lauper, Abraham Lincoln, and former Treasury Secretary John Connally.

MISCONCEPTION #2: I will lose all my property in a bankruptcy case. Not so. The bankruptcy laws are designed to allow a fresh start. A fresh start would be impossible if you would lose all your property. The fact is that most people don’t lose anything in their  bankruptcy because certain personal property is protected.

MISCONCEPTION #3: I can’t own anything after bankruptcy. Not true. In Chapter 7 you can keep the property that is protected in the bankruptcy, and generally anything you acquire after the bankruptcy. The day your bankruptcy is filed acts as a “cut-off” date. Anything you earn after the filing date is yours. Anything that you own or have owed to you before the case is filed is subject to the bankruptcy court’s rules. Most normal belongings are protected (as outlined above).

MISCONCEPTION #4: I will never be able to establish credit after a bankruptcy. Not true. Today, many stores and banks actively market to people who have filed bankruptcy. Most mortgage companies do help applicants get new mortgages with a bankruptcy after two to three years. As a practical matter, you only file a bankruptcy when you can’t pay your bills. Because of that, your credit is probably already bad. A bankruptcy won’t make it any worse. Bankruptcy puts you in a better position to pay current bills and that should improve your chances of getting new credit.

MISCONCEPTION #5: Bankruptcy gets rid of all debts. Not so. Although most consumer and business debts are wiped out in bankruptcy, some debts are not affected. Certain debts can’t be eliminated in bankruptcy. They include child support, spousal support, fines, restitution, some taxes, loans obtained by fraud, student loans, debts due to a DUI, and debts resulting from “willful and malicious” harm.

MISCONCEPTION #6: I can protect my property by hiding it or giving it away before I file bankruptcy. No. It’s a crime to hide property. It’s also a crime to give property away without telling the Court in the bankruptcy filing. The trustee will seek to recover any property you wrongfully transferred prior to a bankruptcy filing. You could end up in jail by attempting to illegally hide or transfer property.

MISCONCEPTION #7: I will lose my job if I file bankruptcy. Not true. The bankruptcy code prohibits an employer from discriminating based on a bankruptcy filing.

MISCONCEPTION #8: I filed a bankruptcy before, so I can’t file again. Incorrect. The law prohibits getting a chapter 7 discharge within 8 years of a previous chapter 7 discharge.  Don’t hesitate to call me if you have filed a previous bankruptcy. You still have many options.

MISCONCEPTION #9: I am not allowed to have a checking account if I file bankruptcy. Incorrect. No rule stops you from keeping or opening a bank account. Most people keep the account that they had and continue to use it without interruption. In other cases, it may be smart to close an existing account prior to filing bankruptcy. That’s because the bank involved may be a creditor in the bankruptcy. In general, if you do not owe any money to the bank where your account is, there is no reason to close the account.

MISCONCEPTION #10: Taxes cannot be eliminated in bankruptcy. Wrong. Many taxes are eliminated in bankruptcy. There are several complex rules that apply. Eliminating taxes depends on how old the taxes are, when the returns were filed, and whether the taxes have been assessed, and the type of taxes. Both federal and state income taxes can be eliminated in bankruptcy. And even in cases where the taxes cannot be eliminated, it’s often possible to force a payment plan on the IRS and stop interest and penalties from being added.

MISCONCEPTION #11: I must be broke to file bankruptcy. Not really. Although it would not make much sense to file for bankruptcy in when you are not in financial trouble, there is no requirement that a person be destitute. The bankruptcy code doesn’t require that you be unemployed, homeless, or own no property. In fact, you are able to file bankruptcy without losing your job, giving up your home, or having your property taken away.

If you have further questions regarding filing for bankruptcy, I offer a free 30 minute telephone consultation where you can get all your questions answered.

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