8 Major Misconceptions About Filing a Personal Bankruptcy

     Though bankruptcy law is extraordinarily complex, a basic understanding of the Bankruptcy Code may be all you need to decide if it is the right decision for you. Here are 8 of the biggest misconceptions about bankruptcy:

     1. You have to be completely broke to file for bankruptcy. Not true. Really, the only requirement to file for bankruptcy is that the debtor cannot pay bills as they come due. Before the current Bankruptcy Code, a “flat broke” debtor would, in all likelihood, become a public charge — because he has nothing left to live on. To avoid this burden on government and taxpayers, Congress has created exemptions that allow debtors to some money and property despite filing for bankruptcy.

     Because people often wait until they are flat broke to seek bankruptcy advice, they often lose their property and assets. Seeking advice earlier increases your chances of holding on some semblance of your life.

     2. An individual who files for bankruptcy will not qualify for credit in the future. Nope. A bankruptcy can appear on an individual’s credit report for up to 10 years, which is a chunk of time for sure — but not permanent.

     If you are considering filing for bankruptcy, you probably have poor credit already. Filing for bankruptcy may be the best bet to restore your good credit. Think about this: A credit card company that receives two applications. One applicant filed for bankruptcy three months ago, the other is in debt over his head, but has not filed for bankruptcy. Who is that company more likely to extend credit to? Applicant #1, who filed for bankruptcy three months ago and who recently received a discharge under Chapter 7 (thereby ensuring that the loan cannot be discharged under Chapter 7 for at least the next six years), or Applicant #2, who never filed for bankruptcy and who could file for bankruptcy at any moment.

     Another way to think about bankruptcy is like a “drawing a line in the sand”. Every month that you keep falling behind, or just do not pay your creditors is another month that your credit keeps going downhill. But, if with a bankruptcy, your credit has hit the bottom and now it is all about recovery and reestablishing your credit.

     3. An individual who files for bankruptcy cannot buy a house. Mortgage lenders are willing to take risks as long as they have enough security and there is something in it for them. This might mean charging higher interest rates and requiring personal guarantees. If you have filed for bankruptcy in the past, but apply for a mortgage and can put together a sufficient down payment, many banks will approve your mortgage loan.

     Most mortgage programs want to see you have at least two years from either your filing date or your discharge date; it all depends on the type of mortgage program you are looking to get. In some cases you might have to wait 4 years from your discharge date. Again, this is dependent on the loan program.

     4. Taxes cannot be discharged in bankruptcy. Wrong. Some taxes actually are dischargeable in bankruptcy, including personal income taxes that are more than three years old. Fiduciary taxes are generally not dischargeable. The Bankruptcy Code’s provisions relating to taxes are very complex, and differ by chapter or type of bankruptcy that you file.

     5. Student loans are non-dischargeable. This one is often true, but has notable exceptions; if you can prove hardship, student loans may be dischargeable.

     6. An individual can file for bankruptcy but not include certain creditors. No way that you can get away with this. Similarly situated creditors must be treated equally, according to Bankruptcy Code.

     7. Family members who loaned money to the debtor will lose out. This is a touchy one, of course, but it is wrong. Although you must list all creditors in the bankruptcy, in certain instances you can repay some creditors after the bankruptcy is filed. (This is often called a reaffirmation agreement.) A court would probably approve the reaffirmation if you live with the creditor/relative and could be forced to leave if you do not repay the debt.

     8. You can lose your job if you file for bankruptcy. Wrong again. In fact, the law states that if you can prove termination solely because of a bankruptcy application, you can sue your former employer. If you look for another job after filing for bankruptcy, however, a potential employer can use that bankruptcy filing as a factor in deciding whether to employ you.
     Written by Josh Michaels who is a freelance writer. He survives on very little income and carefully considered financial decisions. This combination has allowed him to have fun, travel the world, and start a retirement account – all without the pleasure of holding a full-time job. He can be reached at: joshmichaelsmoney@hotmail.com.