10 Common Myths About Bankruptcy

If you are losing sleep worrying about how you are going to pay your debts or deal with a judgment or have a foreclosure pending, filing a bankruptcy may be the best possible solution. Bankruptcy can put an end to worries about debts so that you will no longer have sleepless nights (at least not about debts).Unfortunately, since the changes to bankruptcy law in 2005, myths about bankruptcy have arisen mainly because of misunderstandings, incorrect reporting by news commentators, and incorrect statements made by so-called experts and by those who want you to pay them a fee for their attempt to settle your debts "for a fraction of what you owe."In addition to myths about bankruptcy, some people simply worry about what filing bankruptcy will do to them. An important lesson to learn in life is that over 90 percent of the things we worry about will never happen. The sad fact is that because of myths and worries, people are waiting too long to file and are using up assets that they could keep because of bankruptcy law. Typically, filing a bankruptcy earlier rather than later is the better choice because it will stop the financial bleeding immediately, preserve exempt assets, and credit scores will stop dropping and will begin to improve as soon as you file. Ultimately, filing a bankruptcy may be the best choice you can make at this time in your life as it is simply a financial planning tool.For more than 15 years, Dallas Jolley, attorney and counselor at law, has represented individuals, married couples, and businesses in bankruptcies. 

The following are 10 common myths about bankruptcy:

Bankruptcy Myth #1: The Bankruptcy Reform Act of 2005 Disqualifies 

most People from Bankruptcy.

In 2005, Congress enacted major reforms to our bankruptcy laws. Contrary to public opinion, these reforms do not make it impossible to file a Chapter 7 bankruptcy and

in most cases, it will still wipe out most, if not all of your consumer debt.It is true that the new bankruptcy laws require bankruptcy petitioners to go through more steps before they can file, including credit counseling, but all that involves is filling out an online questionnaire. Then, petitioners must attend a live or online two hour financial education course within 45 days after the meeting of creditors. It is also true that the new bankruptcy laws may prevent some people from filing a Chapter 7 if their income is too high after allowable deductions and expenses are considered and they are able to pay more than 25% of their unsecured debts over 60 months. For these people, Chapter 13 will still bring welcome relief because they will only be paying a fraction of their debts; the court-ordered repayment plan is designed to fit the petitioner's budget. But Chapter 13 has another valuable purpose, if your home is in danger of foreclosure, Chapter 13 is a sure way to bring delinquent house payments current over a 60 month period. See Myth #2 for more information.

Bankruptcy Myth #2: I'll Lose All My Possessions if I File Bankruptcy. 

You do not have to sell or give up all your possessions before you file for bankruptcy. A Chapter 7 bankruptcy ("straight" bankruptcy) includes exemptions that allow you to keep your personal property, your cars, and the home you live in, within certain limits, because the intent is not to have people come out of bankruptcy as paupers. If you have a car loan or lease, you can keep paying and keep the car. If you want to surrender the car and get rid of the expensive payment, you can do that too and not have to pay any deficiency after the car is sold at auction. However, while lenders do not have to renegotiate your car or home loans in Chapter 7, many lenders are doing so today, so it may be worth the effort before you surrender a car or give up your home.As stated in Myth #1, if you are behind on your mortgage payments, you can file a Chapter 13 bankruptcy and bring your mortgage loan current by paying monthly installments on the arrears over up to 60 months. For example, if you $12,000 behind on your mortgage, you can pay $200 extra per month on your mortgage through Chapter 13, and in 60 months, your home loan will be out of default. In fact, Chapter 13 was the original mortgage loan workout program that has always been available to homeowners.

Important note: Please understand that all of your pension funds are exempt, so do not take distributions and loans from your 401K or other retirement plans to pay bills--file bankruptcy and keep all your retirement funds.

Bankruptcy Myth #3: I'll Never Be Able to Buy Another House. 

Many people believe that they will never be able to buy another home if they file a bankruptcy. Or, they may believe that they have to wait for years before they will qualify for a home loan.This is a myth. After bankruptcy, you will qualify for credit again - and in a shorter time period than 10 years. Mortgage companies may require you to accept a higher interest rate because of your credit history. FHA has a loan refinance program for Chapter 13 debtors who have made twelve monthly Chapter 13 plan payments in a row. Normally, two years after a Chapter 7, FHA will loan money on a home purchase. Many times these loans are made at current interest rates!

Bankruptcy Myth #4: I'll Be Fired if I File Bankruptcy. 

Many of our clients worry whether bankruptcy filings are private or public, and about the effect of bankruptcy on their current job or their ability to get a job. It is illegal for any employer to fire you because you file for bankruptcy. If you are fired from your job because you filed for bankruptcy, you should contact an attorney immediately.

Bankruptcy Myth #5: I'm in Trouble Again and I Cannot Get Relief 

from Bankruptcy for Another 8 Years

Wrong. The key advantage to a Chapter 7 is the discharge of your unsecured debts, and you cannot file another Chapter 7 for 8 years, but you can file Chapter 13 in four years from the date you filed your Chapter 7 and receive another discharge through Chapter 13. Or if you have received a discharge in Chapter 13, you can file another Chapter 13 after two years to receive another discharge. If you cannot pay your bills according to your creditor's demands, you can file a Chapter 13 anytime to stretch out your payments.

Bankruptcy Myth #6: Bankruptcies are Expensive

Compared to not being able to pay your debts or having 25% of your wages garnished or property seized and sold, the cost of a bankruptcy is a very minor expense. Filing Fees are as follows: Chapter 7 - $299, Chapter 13 - $274, Chapter 11 - $1,039, and these may be paid in installments to the Court Clerk.Pre-bankruptcy counseling online by Consumer Credit Counseling is $50. The mandatory two hour financial management education course online is $50. Credit reports are $20 for single persons and $40 for married couples. Attorney's fees are quoted by the complexity and type of case. Most attorneys will accept payments. There are no Court set fee for Chapter 7's, so fees are determined by the complexity of the case, and whether judgment liens will be avoided. Typically, attorney's fees for a Chapter 7 in King County are about $1,500.00. The Court sets the base fee for Chapter 13's, which is about to be increased to $3,500. Chapter 11 attorney's fees range from $7,500 to $100,000s of dollars depending upon whether the case is for an individual, family, or corporation and its complexity.

Bankruptcy Myth #7: Won't any Lawyer Do?

Bankruptcy is a specialized area of the law that requires ongoing continuing education, study, and the continually updated forms and financial guidelines require sophisticated software that also link to the credit bureaus. The complexity of the forms and simply understanding what the law and the ever-changing case law requires, demands the expertise provided by a bankruptcy attorney.

Bankruptcy Myth #8: I won't be able to keep my checking and savings account. 

My Credit Union will Hate Me!

If you have a bank account now, you will be able to keep it. If you owe the bank money, you would be wise to open a new account in another bank before you file.If you bank with a credit union, if you have a co-signer, you will just keep up your same payments on loans. If you just have a charge card or personal loan from your credit union, you can stop your payroll deduction, and treat them just like any other creditor and the debt will be discharged in your bankruptcy. They have no connection to your employment other than they may rent space at your place of employment. It is wise to not have much money on deposit in your credit union when you file as they will try to take all of it if you have a credit union loan because as a member, you agreed that they will cross-collateralize deposits, personal loans, and car and home loans.

Bankruptcy Myth #9: I am scared of the process.

Most debtors only have to attend one meeting in the Federal Courthouse, which is the meeting of creditors, and seldom does a creditor attend the meeting. Your attorney will attend the meeting with you and help you answer the Trustees questions. The Trustee reviewing your case is respectful and very few debtors actually are required to attend a bankruptcy hearing before a judge as most of the work is done by your attorney on your behalf.

Bankruptcy Myth #10: But I'll Never Get Credit Again 

Because Bankruptcy will Ruin my Credit.

Your credit is already ruined because YOU HAVE TOO MUCH CREDIT and YOU HAVE A TERRIBLE PAYMENT HISTORY BECAUSE YOU CANNOT AFFORD TO PAY YOUR BILLS ON TIME. Nearly everyone who makes this statement already has terrible credit.Bankruptcy stops the downward spiral of your credit score, and as you continue to pay your mortgage and your car loan payments after your bankruptcy, your credit score will improve. The best case we have seen is a client with a 476 score when he filed bankruptcy that has a 634 score a year later. FHA does not have a minimum credit score requirements, but most banks who make FHA loans required a 580 score.

After your bankruptcy, the key to improving your credit score is paying your bills on time and building your savings and investments. Developing an attitude of saving and investing rather than spending is the key to financial freedom. First, save three to six month's income as an emergency fund and then start an investment program. Investing ten percent of your income is a good start. I particularly like the lesson taught in the movie Sabrina with Humphrey Bogart and Audrey Hepburn. Over the years of chauffeuring the wealthy family, the chauffeur who lived above the garage, listen to them talk about investments, and unbeknownst to them, the chauffeur invested his saving using their advice and he became a millionaire. So what bankruptcy can do for you is give you a fresh start, and then, debt free, you can begin a program of savings and investment.

As a former financial planner, Mr. Jolley will be able to analyze your financial situation and recommend what course of action will be best for you considering your specific circumstances at this time.

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(253) 565-9300