Myths About Filing for Bankruptcy

1 .The Whole World Will Know I've Filed

You probably have read more negative financial news than you have ever wanted to in the last few years as the economic recession has gripped the world. High on those headlines are high-profile bankruptcies of individuals and corporations.  If you have found yourself in a massive amount of credit card debt or other debt related to a mortgage or car loans, you may be fearful that the entire world is going to know if you file Chapter 7, 11, or 13. 

This is an understandable worry and one that most people have who file bankruptcy to discharge their revolving and installment debts.  After all, you may have spent years or even decades building a social profile in your community, state, or even the entire country for you and your family. You may be fearful that your job, or in this economy, your job prospects may be tarnished by public knowledge that you've gotten into a bad place with debt and need a fresh start.

While this is an understandable worry, unless you have an extremely high profile to the point that news outlets are going to research you on an ongoing basis or unless you tell people about your filing, the chances are slim that more than a handful of people, namely your attorney and those in the courts, are going to know that you have filed for debt relief.

You have to weigh the positives and the negatives, as with most situations.  If you truly need the fresh start that bankruptcy can offer, this should be a minor concern, and more often than not, people will understand if they do find out.

2. Everything I Own Will Be Taken Away

Chapter 7 is the only form of bankruptcy that liquidates your assets in order to settle your debts with creditors such as credit card companies and mortgage lenders.  However, even in Chapter 7, you will have exemptions. For example, in Florida your entier home is exempt regardless of it's value.

Under federal law you have set exemptions, your state may then increase those exemptions in its legislature.

The federal exemptions currently stand as follows:

Federal Exemptions for Property Under Bankruptcy
Your Home (The Homestead Exemption) $20,200.00*
Life Insurance Policy with Available Loan Value $9,850.00
$475 for any household item up to $9,850.00 total $9,850.00
Jewelry (Rings, Necklaces, Broaches, etc...) $1,225.00
Vehicles $3,225.00
Personal Injury Benefits $18,450.00
Tools for Your Job $1,850.00
Wild Card - Anything you want to keep up to $925.00 in value $925.00

*Any unused portion of the home allowance up to $10,125.00 can be used for any other property owned by the filer.

3. I Will Never Be Able to Get a Loan or Credit Cards Again

This is factually untrue. There are a multitude of companies that specialize in issuing credit cards to people who have had prior financial problems in order to help them rebuild credit.  However, these are known as sub-prime credit card lenders and the fees and interest rates tend to be very high. There is another avenue to take to reestablish a positive revolving credit history. Secure credit cards allow you to open a savings account with a bank and have a card issued against it for the amount you have deposited. Often, these banks will report the credit card as a regular card to the major credit bureaus. 

You may also be wondering about car loans and mortgages. Again, these are available to those who have filed for bankruptcy, however, you can again expect to pay higher fees and interest rates.  If you need a new car or home, it is best to get these loans before filing if it is possible.

Another point to note is that if you have a card with a zero balance you do not have to list the company who issued the credit card in your bankruptcy filing as they are not technically a creditor at that point in time.  In this case you may be able to keep that card.  However, the company may have a policy that will close the card if they review your credit report and discover you have filed for bankruptcy.

4. Both My Spouse and I Will Need to File for Bankruptcy

This is not necessarily the case. If you are married and have a large amount of credit card or other debt in your name only it is possible to file bankruptcy alone. However, if you have joint debts and attempt to file, the creditors will demand full payment of the debt or ask to not be included in your filing. 

Obviously, if you are married and it is possible for only one of you to file a bankruptcy claim then that is the best case scenario because at least one of you can retain good credit and thus avoid higher interest rates and fees for loans and credit cards.

5. The New Bankruptcy Laws Make It Nearly Impossible to File

It's true that several years ago the lobbyists for banks pushed through massive bankruptcy reform to make it more difficult for you to simply file bankruptcy.  The new rules largely revolve around income versus debt. However, these rules can get complicated very quickly and it is best to talk to a knowledgable professional about your options.

In large part, the rules preclude someone who's income is higher than a set threshold (determined on a state-by-state basis) to file a Chapter 7 bankruptcy. However, there are special rules if your income is above that threshold. If you have so much debt that it is not possible to repay your debt under a Chapter 13 plan it is still possible to file Chapter 7. Again, an experienced bankruptcy attorney can help you make this determination.

6. I Can Exclude Certain Creditors From My Filing

This is not true. Bankruptcy in essence is an all or nothing proposition. However, it is important to remember that there are exceptions, as there are in most laws.  If you have a credit card, for example, with no balance, that credit issuer is not a creditor at the time of the filing and therefore does not need to be listed in the filing.

While you can't exclude your mortgage holder or auto loan holder from you filing, it is possible to sign a reaffirmation agreement with them so you don't have to include those debts under your bankruptcy plan.  It is important to note that if the equity value of your home or vehicle loan exceeds your state's exemption amount, then you will most likely have to include those creditors and possibly sell those assets, depending on the state in which you live.

7. I should Max Out My Credit Cards Before I File

Maxing out your credit cards is not a good idea if you know you are about to file for bankruptcy. This can in fact be construed as criminal fraud and judges and trustees of the court can hold you accountable for those debts, either making you pay them in whole or dismissing your bankruptcy case altogether.  It is best to stop charging now if you are in debt.  If the courts think you have maliciously run up further debts it can jeopordize your attempt to start afresh from bankruptcy.