With a mind toward declawing the monster, here are a dozen
misconceptions about bankruptcy:
Everyone will know I've filed for bankruptcy. Unless you're a
prominent person or a major corporation and the filing is picked up by
the media, the chances are very good that the only people who will know
about a filing are your creditors. While it's true that bankruptcy is a
public legal proceeding, the numbers of people filing are so massive,
very few publications have the space, the manpower or the inclination to
run all of them.
All debts are wiped out in
Chapter 7 bankruptcy. You wish. Certain types of debts cannot be
erased. They include child support and alimony, student loans and debts
incurred as the result of fraud. It's also very unlikely that a judge
will discharge legal settlements you've been assessed, such as money
you've been ordered to pay to someone who sued you.
I'll lose everything I have. This is the misconception that keeps
people who really should file for bankruptcy from doing it, says Chris
Viale, chief operating officer of Massachusetts-based Cambridge Credit
Counseling.
"They think the government will sell everything they have and they'll
have to start over in a cardboard box," Viale says.
While the bankruptcy laws vary from state to state, every state has
exemptions that protect certain kinds of assets, such as your house,
your car (up to a certain value), money in qualified retirement plans,
household goods and clothing.
"For most people, they'll pass through a bankruptcy case and keep
everything they have," says John Hargrave, a bankruptcy trustee in New
Jersey. If you have a mortgage or a car loan, you can keep those as long
as you keep making the payments (like the rest of us).
I'll never get credit again. Quite the contrary. It won't be long
before you're getting credit card offers again. They'll just be from
subprime lenders that will charge very high interest rates. "There are
innumerable companies that will provide credit to you," says California
bankruptcy attorney and trustee Howard Ehrenberg. "I don't advise any of
my clients to run out and run up the bills again, but if someone does
need an auto, they can go and will be able to get credit. You
don't have to go underground or something to get money."
However, if you're planning to buy a house or a car, you might want to
do that before you file. Those loans will be tough to get, and the
higher interest rate on such a large purchase would make a significant
impact on your payments. Also, if you have a credit card with a zero
balance on the day you file for bankruptcy, you don't have to list it as
a creditor since you don't owe any money on it. That means you might be
able to keep that card even after the bankruptcy.
If you're married, both spouses have to file for bankruptcy. Not
necessarily. "It's not uncommon for one spouse to have a significant
amount of debt in their name only," Hargrave says. However, if spouses
have debts they want to discharge that they're both liable for, they
should file together. Otherwise, the creditor will simply demand payment
for the entire amount from the spouse who didn't file.
It's really hard to file for bankruptcy. It's really not. You
don't even technically need an attorney. However, it's not recommended
to go through the procedure without one.
Only deadbeats file for bankruptcy. Most people file for
bankruptcy after a life-changing experience, such as a divorce, the loss
of a job or a serious illness. They've struggled to pay their bills for
months and just keep falling further behind.
I don't want to 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. Bless you for even thinking about
such a thing. You're no longer obligated to repay them, but you always
have that opportunity. If your conscience won't let you sleep nights
because you didn't pay your debts, there's nothing in the bankruptcy
code that prevents you from doing that once you're back on your feet.
But bankruptcy is an all-or-nothing deal, so you have to include all
your creditors in the petition.
Filing for bankruptcy will improve my credit rating because all
those debts will be gone. That sounds like an ad for a bankruptcy lawyer
trolling for clients. Filing for bankruptcy is the worst 'negative' you
can have on your credit report. Unlike other negatives, which stay on
your report for seven years, bankruptcy can be there for 10 years.
You can't get rid of back taxes through bankruptcy. Generally
speaking, this is true. However, there is such a thing as tax
bankruptcy, says tax educator Eva Rosenberg, known on the Web as Tax
Mama. To get a shot at it, you have to file all your returns and the
taxes owed need to be at least three years old.
You can only file for bankruptcy once. The truth is, you can only
file for Chapter 7 bankruptcy once every six years, Hargrave says. For
Chapter 13 reorganization, you can file more often than that, but you
can't have more than one case open at the same time, he says.
Of course, that doesn't make it a good idea.
"Multiple bankruptcies are really bad," Rosenberg says. "Many people get
into the habit of once they've done it, it becomes a way of life. This
is not good for your karma." Or your credit rating.
I can max out all my credit cards, file for bankruptcy, and never
pay for the things I bought. That's called fraud, and bankruptcy judges
can get really cranky about it. The trustee in your case will review all
your purchases right before your filing. He knows what to look for.
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