15 Bankruptcy Myths

We’ve heard a lot of misinformation about this. Some of the worst falsehoods my clients have been told are: • The bankruptcy laws have been repealed by Congress. • If you didn’t file for bankruptcy before October 17, 2005, you are no longer allowed to file. • Only corporations can now file for bankruptcy. • You cannot discharge credit card bills under the new bankruptcy laws. • You cannot discharge medical bills under the new bankruptcy laws. • You can only keep one car or one truck if you file under the new bankruptcy laws. • You will have to give up all of your vehicles if your file for bankruptcy. • The IRS will audit all of your prior tax returns if you file for bankruptcy. • You can only have one TV and one VCR if you file for bankruptcy and if you have a DVD it will be taken by the Trustee. • You can no longer stop a foreclosure by filing for bankruptcy. • If you file for bankruptcy, all of your bank records and tax records will be audited. • An FBI agent will come to your home and will take photographs of everything. • Before you can file for bankruptcy, you must pass a written test. Likewise, you must pass another test to get out of bankruptcy. • Before you can complete your bankruptcy case, you must pass a lie detector test. • After you file for bankruptcy, you will never be entitled to another tax refund. ALL OF THESE ARE COMPLETELY, TOTALLY, AND UTTERLY FALSE! In fact, nothing could be further from the truth. The truth is that you can do almost everything under the NEW law that you could do under the OLD law.

FALSE. 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 and the people who you tell. While it’s true that your bankruptcy is a matter of public record, so many people have filed—well over 1 million during 2009 alone—unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed.

FALSE. Nothing could be further from the truth. The fact is that most people who file bankruptcy keep everything they have-their house, their cars and their household items-and don’t lose anything except their debts.

FALSE. In the future, you can buy, own and possess whatever you can afford. Virtually all of my clients receive pre-approved car loans and credit cards as soon as they receive their discharge, and many of my Chapter 13 bankruptcy clients with homes are able to refinance while in their bankruptcy. If you want to check out what some very famous people did after they filed for bankruptcy (and, yes, they owned a whole lot of things afterwards), look at the list of The Rich and Famous (and Bankrupt) people who filed bankruptcy on my website.

FALSE. Filing bankruptcy gets rid of debt, which puts you in a position to handle more credit, and this makes you look more attractive to would-be lenders. In my clients’ experience, once you get your bankruptcy discharge, you will be flooded with offers for new credit cards and car loans. At first, lenders will want more money down and will want to charge you higher interest rates. However, over time, if you are careful, and keep your job, and start saving money, and pay your bills, and do things that will put good marks on your credit report, your credit scores will get higher, and the terms you can get will improve. Many of my clients can qualify for mortgages, at regular rates, two years after their discharge.

FALSE. Bankruptcy is reported on your credit report for up to 10 years (Chapter 13 will usually drop off after seven years), but that does not mean it will have a negative effect on your credit standing. In fact, many credit scores actually improve after they file Chapter 7 or Chapter 13. Here’s why. By the time you need to make an appointment to see a bankruptcy attorney, your credit is usually trashed, messed up and maxed out. This being the case, you have no credit for bankruptcy to hurt. There’s nowhere to go but up, and filing bankruptcy can help wipe out the balances to put you in a position to rebuild.

FALSE. In cases where both husband and wife have a lot of debt, it makes sense and saves money for them to both file, but it is never a requirement. In fact, most of the cases we file where our client is married, only one spouse files. And if you don’t have any joint debt, your filing will have no direct impact on your spouse’s credit.

FALSE. In the hands of an experienced California bankruptcy professional attorney, your bankruptcy case normally goes very smoothly. I do all the heavy lifting for you, leaving you free to concentrate on your family and loved ones.

FALSE. The vast, overwhelming majority of the people who file bankruptcy are good, honest, hard-working people, just like you and me, who file as a last resort. They have spent months or years struggling to pay the bills left over from some life-changing experience, such as a serious illness, the loss of a job, separation or divorce, a failed business venture, or some family emergency…or because they honestly and mistakenly fell into debt at a young age before they knew better…before they knew anything about budgeting or how to manage money. A recent study by Professor Elizabeth Warren of Harvard Law School found that over half of all bankruptcies are related to illness, and 75% of those people who end up filing because of medical bills have health insurance. People want to pay their debts. They want to be able to know that they’ve done “the right thing” by repaying everyone. But the fact is that credit card companies, collection agencies, mortgage companies and other bill collectors make it difficult to pay debts, and just about impossible to catch up once you’ve fallen behind. That’s why the bankruptcy laws exist—to help honest people get a fresh financial start.

FALSE. Well over 1,000,000 Americans filed for bankruptcy in 2010. Lots of good, honest, hard-working people fall on hard times. Let’s face it—life can be brutal, and sometimes the money’s just not there. The bankruptcy laws were created with this in mind—to make sure you have a way, if need be, to get free from the burden of debt so that you and your family can have a second chance at a “fresh start”. Far from being immoral, the origins of the modern bankruptcy code are in the Bible. Look at the “Sabbatical Year” and “Jubilee Year” and forgiveness of debts found in Leviticus 22, Deuteronomy 15 and other sections of the Old and New Testaments. And morality is a two-way street. What about the obscene interest rates being charged for credit cards, the one-sided loan terms required by lenders, or the abusive and illegal tactics followed by many collection agencies?

FALSE. The minute you file bankruptcy, the Bankruptcy Court issues an order called the “Automatic Stay” telling your creditors to leave you alone. No more phone calls. No more collection letters. No more lawsuits. No garnishments. No repossessions. No foreclosures. Nothing. The Automatic Stay stops your creditors from taking any collection actions against you or your assets. Once you file bankruptcy, the creditor is not even allowed to talk to you or send you letters. In addition, the creditor must stop any collection attempts already started. The Automatic Stay is very powerful, and puts the full weight of the United States Courts to work for you, to make sure your creditors leave you alone. And if they don’t follow the law? We sue them, and they pay you.

FALSE. Filing bankruptcy is not the problem. The problem is not being able to pay your bills. All good, honest, hard-working people feel a strong desire to pay their bills, and not being able to do so causes them tremendous stress. Bankruptcy is designed to get you out from under the heavy weight of debt and collectors, to protect your property and to lower your stress level. If your experience is like that of other couples, you will find that filing bankruptcy and lowering the stress level can be a crucial first step in bringing the love and caring back into your relationship….which, in turn, gives your marriage a fighting chance.

FALSE. We have gotten rid of millions of dollars of back taxes for our clients. Certain federal, state and local income taxes, inheritance taxes, and personal property taxes may be wiped out under the bankruptcy laws. There are several qualifications that have to be met, but once these are met, these taxes are gone.

FALSE. There are different kinds of bankruptcy; depending on your problem you may be able to file for bankruptcy as often as necessary. Even if Chapter 7 is not an option (you can only get a Chapter 7 discharge once every 8 years), you may be able to file for Chapter 13 or Chapter 11 and accomplish many of the same goals.

FALSE. You could file bankruptcy even if you only have $500 in debt, although you would need to have your head examined because it costs $299 in court filing fees to file a Chapter 7. There is no minimum amount of debt—all that is required is that you are unable to pay your debts with your current income. It’s not the debt that is determinative, but often is the assets and income. I have filed bankruptcy cases for people with $5,000 worth of debt, but have turned away potential clients with $50,000 worth of debt—the key was not their debt level, but their overall situation including but not limited to their ability to pay.