There’s a substantial amount of misinformation out there. I hear some of these myths from clients in my Charleston, South Carolina bankruptcy practice. This page is all about those myths and the truth about these misconceptions.
1. Bankruptcy will ruin my credit for ten years.
False. It’s true that any negative information on your credit report will remain on your credit report for ten years. However, it is not true that, simply because a bankruptcy appears on your credit report, you’re credit is destroyed or “ruined” for ten years. Bankruptcy helps people resolve financial problems. If you can’t pay your debts, your credit rating is probably damaged already. And if you’re up to your eyeballs in debt, who would ever give you a loan? Think about it. Pretend you’re a banker. Would you rather loan money to someone in your financial situation now, or, say, three years from now when the person has no debt? Remember, debt/income ratios are the key to getting many loans, especially mortgage loans. Debt is like a tumor. You either cut it out by paying it back, which many people just can’t do, or you discharge the debt by filing bankruptcy. But the problem must be addressed. It won’t just go away on its own. Don’t let your credit rating get in the way of getting help. One other thing: your good credit rating may have been the reason you got into so much debt in the first place!
Most lenders will approve people for mortgages two to four years after your case is over. This has consistently been my experience in dealing with mortgage underwriters during the fifteen years I’ve practiced bankruptcy law. Your credit will improve quickly after bankruptcy. And had those same borrowers not filed, they most certainly would have been denied mortgages.
Bottom line: If you have financial problems, deal with them. And bankruptcy may be one way to do that. Seek advice from a qualified lawyer to find out about your options.
2. If I file bankruptcy, I’ll have to give up all my property.
False. When you file your case, you’re allowed to claim “exemptions” in various property. The exemptions you may claim depend on where you live and, in many instances, how long you’ve lived in that state. South Carolina is an “opt out” state. This means that in South Carolina you can’t claim federal exemptions. You must claim South Carolina exemptions unless you haven’t lived in South Carolina for two years prior to filing your case. South Carolina exemptions are reasonable and have been increased significantly over the last few years. For example, you are allowed to have $51,450 in home equity per debtor. This means that a married couple would be allowed almost $103,000 in equity in their home. There are other exemptions for vehicles, retirement accounts, household goods, tools of the trade, worker’s compensation claims, jewelry, cash value life insurance, and several other classes of property.
Bottom line: You won’t lose “all” your property. In fact, the overwhelming majority of filers don’t lose any property.
3. You can’t “bankrupt” taxes.
It depends. I heard this one on the radio from a very famous financial adviser. In fact, many times you can discharge certain tax debt. (And the correct term is “discharge” debt, not “bankrupt” debt.) This all depends on what type of taxes you owe, whether you filed you returns on time, and whether you engaged in tax fraud or evasion. For a discussion of discharging income tax debt, check out my post on that subject. As you’ll see, you may be able to discharge income tax debt. Also, even if you can’t discharge the debt, you can establish a manageable way of paying the tax debt in a Chapter 13 (a “repayment” or “reorganization”) plan.
Bottom line: Sometimes you can discharge taxes, and sometimes you can’t.
4. I don’t have to “file on” all my debts.
False. As I’ve said before, when you file your case, you must list all of your debts–even the debt to mom or Uncle Al. However, that doesn’t mean you can’t voluntarily pay mom or Uncle Al after your case is over. In fact, you’ll cause problems for them if you pay them prior to your case. Also, for secured debts, the rule is simple: If you want to keep it, you must pay for it. (Sometimes the amount you pay and interest rate you pay can be modified, but you’ll still need to pay for the collateral–property–securing the loan.) So if you want to keep your house, you’ll need to continue making the required payments. The same goes for your car. So just because you must list all of your debts, doesn’t mean you won’t pay them back.
Bottom line: You must list ALL of your debts. You’ll sign documents under penalty of perjury stating that your schedules are accurate.
5. Bankruptcy law has changed and it can’t help people anymore.
False. While it’s true that the law has changed by the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005, the number of debtors obtaining a Chapter 7 discharge is statistically the same as it was prior to the passage of the new law. Don’t get me wrong, I’m not a fan of the law one of my colleagues refers to as BARF (“Bankruptcy Abuse Reform Fiasco”). The new law was bought and paid for by the credit industrial complex–largely credit card issuers. The problem is that the credit card issuers don’t know bankruptcy law, and they ignored repeated warnings from judges, law professors, and lawyers telling them the legislation was problematic. The law simply added more requirements to the process like the silly “credit counseling” session required prior to filing. Texas Judge Frank Monroe aptly described the new law as follows:
Those responsible for the passing of the Act did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act. This is because the parties pushing the passage of the Act had their own agenda. It was apparently an agenda to make more money off the backs of the consumers in this country. It is not surprising, therefore, that the Act has been highly criticized across the country. In this writer’s opinion, to call the Act a ‘consumer protection’ Act is the grossest of misnomers.
It should be obvious to the reader at this point how truly concerned Congress is for the individual consumers of this country. Apparently, it is not individual consumers of this country that make the donations to the members of Congress that allow them to be elected and re-elected and re-elected and re-elected.
The Act has also been sharply criticized by Tennessee Bankruptcy Judge Keith Lundin, who is probably the most knowledgeable judge in the country on Chapter 13 issues.
Despite all this, the only thing the law has really achieved it to make it more of a hassle to file. Still, the results most debtors now see are the same as they would have seen under the old law. (For an overview on the process, read my free bankruptcy guide.)
Bottom line: The new law just makes you jump through more hoops. The Bankruptcy Code’s fresh start is still available to the “honest but unfortunate” debtor.
6. If I file bankruptcy, my friends, family, and neighbors will find out.
False. The only way anyone would find out if you filed bankruptcy is if they checked court records. Why would anyone you know check the court’s records just for the heck of it? To be sure, it will be on your credit report, but it’s highly unlikely anyone you know will find out you filed bankruptcy.
Bottom line: Unless your friend or neighbor also files bankruptcy and you see them at court, they’ll almost certainly never find out you filed bankruptcy. In addition, if you have financial problems, you must deal with those problems regardless of who might–however unlikely it may be–find out that you filed bankruptcy.
7. If I file bankruptcy, my spouse must also file bankruptcy.
False. You file bankruptcy to discharge debt. If only one spouse has a substantial amount of debt, there’s no need for both spouses to file. Unless you are separated from your spouse, however, both your income and your spouse’s income must be listed in your bankruptcy. The Bankruptcy Code considers all income from all household members. It also considers the non-filing spouse’s debt and expense payments. For example, generally speaking, no one can force both spouses to file. So if the non-filing spouse has a $350 per month car payment and $200 per month in credit card payments, those payments would reduce what she can contribute to the other household expenses. On the means test, this is called the “marital adjustment.”
Bottom line: Your bankruptcy lawyer must evaluate both spouses’ financial situation to determine if both spouses need to file. If one spouse doesn’t need to file, there’s no need–or requirement–that both spouses file bankruptcy.
8. You can’t file bankruptcy more than once.
False. While it’s rare to see people file bankruptcy more than once, the Bankruptcy Code does allow it. The time limits run from filing date to filing date, and the limits are determined by what chapter you filed before and what chapter you file the second time. For example, if you filed a Chapter 7 bankruptcy, you must wait eight years to file another Chapter 7 bankruptcy. To go from Chapter 13 to Chapter 7, you must wait six years. To go from Chapter 7 to Chapter 13, you must wait four years. And from Chapter 13 to Chapter 13, you must only wait two years. This all assumes you actually received a discharge of your debts in the previous case. If you didn’t get a discharge, there is no waiting requirement, but there may be limits to how the automatic stay works if you had another bankruptcy case pending within the year before you filed the next bankruptcy.
Bottom line: Some people have legitimate reasons for filing bankruptcy more than once, and the Bankruptcy Code allows this with some restrictions.
9. If a pass the means test, I automatically qualify for Chapter 7 bankruptcy.
False. You must also pass the “totality of circumstances test.” This means that even if you pass the means test, the court may review your budget and determine that you have sufficient disposable income to fund a Chapter 13 (payment plan) bankruptcy. In fact, in South Carolina, almost all the cases finding “abuse” under Chapter 7 involved cases in which the debtors passed the means test, yet the bankruptcy court ruled that they were capable of funding a Chapter 13 case.
For example, the means test gives debtors an unlimited expense allowance for secured debt, so if a debtor (let’s assume we have a family of four–husband, wife, and two children), earned $120,000 a year, but had a 4,500 mortgage payment, a car payment of $650, and another car payment of $500, the debtor might pass the means test. Rest assured, however, that our South Carolina court would never grant debtors with these expenses and income a Chapter 7 discharge. The court would reason that at least one of the cars could be surrendered, a substantially cheaper replacement vehicle could be obtained, and that the couple could rent a suitable home for less than $2,000. Again, the “totality of circumstances” test really depends on the unique facts of each case. But absent some extreme circumstances (perhaps huge amounts of alimony, child support, and medical expenses), a Chapter 7 discharge would not be allowed here in South Carolina.
There’s one more thing you should keep in mind. If your debts are primarily business debts (incurred for some business or investment purpose, not for “personal, family, or household” use), neither the means test, nor the totality of circumstances test, apply. Absent extraordinary circumstances–largely involving bad faith–you are allowed to file a Chapter 7 bankruptcy.
Bottom line: Passing the means test does not guarantee your eligibility for a Chapter 7 bankruptcy.
10. Filing bankruptcy will harm your marriage and family life because of the stress and stigma of filing.
False. I see the exact opposite here in Charleston. Bankruptcy saves marriages. It relieves stress. It keeps families together. If filing bankruptcy is appropriate, put your family ahead of your ego and get the help you need.
Bottom line: Bankruptcy saves marriages.