Top 6 Bankruptcy Myths
There are many bankruptcy myths out there. These myths keep individuals from seeking out help and considering other potential options. However, most of these myths are completely wrong. If you are facing financial hardship, you owe it to yourself to understand your options.
1. Your credit score drops excessively and you won’t be able to get credit for 10 years
This bankruptcy myth keeps people from considering bankruptcy. They believe trying to negotiate debts or doing nothing will result in better credit situation than if they filed for bankruptcy. In reality, my of my clients have their credit score actually gets better after bankruptcy. If you are 90 days late or more on your credit report, you credit has likely taken a big hit. The bankruptcy cancels out the negative credit history; past due balances are marked at zero. Now, if you file bankruptcy with a 820 credit score, you will likely see a negative impact. But if you are like most of my clients with credit scores of 700 or lower, then the negative impact will be minimal or not at all.
The only real limitation on your credit will be the ability to purchase a home. You have to wait two years after your bankruptcy to qualify for FHA mortgage. If you file a Chapter 13, you have to wait one year after discharge to qualify for a mortgage. Additionally, you will be getting many credit card and car offers in the mail immediately after filing for bankruptcy. This occurs since you can only file a Chapter 7 bankruptcy once every 8 years. AS a result, many creditors believe you are a good credit risk. Of all the bankruptcy myths, this one bothers me the most. Many people struggle for months or years trying to find a way out of debt, when if they knew that bankruptcy could potentially help their credit, they might have considered the option sooner.
2. You are going to lose everything if you file bankruptcy
This bankruptcy myth has some basis in the truth. If you file a Chapter 7, which is also known as a liquidation, you are allowed to keep certain things. These are items that have no value or any value is protected by an exemption. Exemptions are basically protections set out by state or federal law. The court understands you cannot start from zero, so they allow you to protect certain things. These protections vary state to state; you should talk to your bankruptcy attorney about what exemptions apply in your situation.
In a Chapter 13, you are allowed to keep everything you want. The reason you get to keep everything is that you are in a three to five year payment plan. During this payment plan you must pay the value of all your non-exempted assets. We use Chapter 13 for when individuals have too significant of assets or too high of income.
3. You cannot discharge taxes in bankruptcy
4. You cannot have money in retirement
5. Married partners have to file for bankruptcy together
6. You make too much money to qualify for bankruptcy
There is a little bit of truth to this last bankruptcy myth. We mentioned above that you can make too much money to qualify for Chapter 7. However, you always have the option of Chapter 13. As a result, you have a bankruptcy option at every income level.
Additionally, if you tell me you have higher than average income, it does not mean you do not qualify for a Chapter 7; the analysis for Chapter 7 considers whether you have any disposable income. If your income is below the state median for your household size, you qualify for Chapter 7, basically no questions asked. If you are above the media, we have to do an analysis; this analysis is called the Means Test. The Means Test looks at your household income and subtracts out of your actual expenses (mortgage, car, payment, taxes, etc.) and some reasonable expenses (food, utilities, rent, etc.). As a result, two people with the same income and same household size could have drastically different results. They only way to know for sure if you qualify for a Chapter 7 is to have an experienced attorney run the numbers.