Like most big, bad scary things, bankruptcy
has a reputation based on a few tidbits of truth and lots
of embellishment. And like most creepy crawlies, it's not
nearly as frightening once you know the truth.With a mind toward declawing the monster, here are a dozen
misconceptions about bankruptcy:
1. Everyone will know I've filed
for bankruptcy.
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. While it's true
that bankruptcy is a public legal proceeding, the numbers
of people filing are so massive, very few publications have
the space, the manpower or the inclination to run all of them.
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2. All debts are wiped out in
Chapter 7 bankruptcy.
You wish. Certain
types of debts cannot be discharged, or erased. They include
child support and alimony, student loans and debts incurred
as the result of fraud. It's also very unlikely that a judge
will discharge legal settlements you've been assessed, such
as money you've been ordered to pay to someone who sued you.
3. I'll lose everything I have.
This
is the misconception that keeps people who really should file
for bankruptcy from doing it, says Chris Viale, chief operating
officer of Massachusetts-based Cambridge Credit Counselling
Corp.
"They think the government will sell
everything they have and they'll have to start over in a cardboard
box," Viale says.
While the bankruptcy laws vary from state to state, every
state has exemptions that protect certain kinds of assets,
such as your house, your car (up to a certain value), money
in qualified retirement plans, household goods and clothing.
"For most people, they'll pass through
a bankruptcy case and keep everything they have," says
John Hargrave, a bankruptcy trustee in New Jersey. If you
have a mortgage or a car loan, you can keep those as long
as you keep making the payments (like the rest of us).
4. I'll never get credit again.
Quite the contrary. It won't be
long before you're getting credit card offers again. They'll
just be from subprime lenders that will charge very high interest
rates. "There are innumerable companies that will provide
credit to you," says California bankruptcy attorney and
trustee Howard Ehrenberg. "I don't advise any of my clients
to run out and run up the bills again, but if someone does
need an automobile, they can go and will be able to get credit.
You don't have to go underground or something to get money."
However, if you're planning to buy a house
or a car, you might want to do that before you file. Those
loans will be tough to get and the higher interest rate on
such a large purchase would make a significant impact on your
payments. Also, if you have a credit card with a zero balance
on the day you file for bankruptcy, you don't have to list
it as a creditor since you don't owe any money on it. That
means, you might be able to keep that card even after the
bankruptcy.
5. If you're married, both spouses
have to file for bankruptcy.
Not necessarily. "It's
not uncommon for one spouse to have a significant amount of
debt in their name only," Hargrave says. However, if
spouses have debts they want to discharge that they're both
liable for, they should file together. Otherwise, the creditor
will simply demand payment for the entire amount from the
spouse who didn't file.
6. It's really hard to file for
bankruptcy.
It's really not. You don't even technically
need an attorney. However, it's not recommended to go through
the procedure without one.
7. Only deadbeats file for bankruptcy.
Most people file for bankruptcy after a life-changing
experience, such as a divorce, the loss of a job or a serious
illness. They've struggled to pay their bills for months and
just keep falling further behind.
8. I don't want to include certain
creditors in my filing because it's important to me to pay
them back someday and if the debt is discharged, I can't ever
repay them.
Bless you for even thinking about such
a thing. You're no longer obligated to repay them, but you
always have that opportunity. If your conscience won't let
you sleep nights because you didn't pay your debts, there's
nothing in the bankruptcy code that prevents you from doing
that once you're back on your feet. But bankruptcy is an all-or-nothing
deal, so you have to include all your creditors in the petition.
9. Filing for bankruptcy will
improve my credit rating because all those debts will be gone.
That sounds like an ad for a bankruptcy lawyer
trolling for clients. Filing for bankruptcy is the worst 'negative'
you can have on your credit report. Unlike other negatives,
which stay on your report for seven years, bankruptcy can
be there for 10 years.
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10. You can't get rid of back
taxes through bankruptcy.
Generally speaking, this
is true. However, there is
such a thing as tax bankruptcy, says tax educator Eva Rosenberg,
known on the Web as Tax Mama. To get a shot at it, you have
to file all your returns and the taxes owed need to be at
least three years old.
11. You can only file for bankruptcy
once.
The truth is, you can only file for Chapter
7 bankruptcy once every six years, Hargrave says.
For Chapter 13 reorganization, you can file more often
than that, but you can't have more than one case open at the
same time, he says.
Of course, that doesn't make it a good idea.
"Multiple bankruptcies are really bad," Rosenberg
says. "Many people get into the habit of once they've
done it, it becomes a way of life. This is not good for your
karma." Or your credit rating.
12. I can max out all my credit
cards, file for bankruptcy, and never pay for the things I
bought.
That's called fraud and bankruptcy
judges can get really cranky about it. The trustee in your
case will review all your purchases right before your filing.
He knows what to look for.
If you want to know more about this thema you can go to http://www.clear-a-debt.com
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