10 Bankruptcy Myths
1. If I renegotiate or settle with my creditors directly, I can avoid bankruptcy and save my credit score.
In order for you to settle your debts with credit card issuers you will need to be several months months behind on your payments. By then your credit score will have decreased considerably. After several months of non-payment and numerous attempts to collect, the credit card issuer will likely send you a settlement letter asking if you would like to settle the debt at up to 50% of the outstanding balance. In other words, if you owe $10,000 they may settle for $5,000. However, they will most definitely request a lump sum payment which few people, who are clearly having problems paying even the minimum monthly payments, will have. Moreover, if you were to settle, you would very likely be taxed on the “cancelled” amount. Unfortunately, many people who settle with one credit card issuer still have other cards with balances on them which they still have problems paying. Meanwhile, their credit score continues to plummet.
2. If I file bankruptcy, my credit score will be ruined indefinitely.
There’s a good chance that if you are considering filing bankruptcy your credit score has already taken a hit by late payments or default. Typically, filing bankruptcy will allow to you repair the damage that has been done. Many people mistakenly think that by filing bankruptcy their credit score is permanently damaged. That is not true. While a Chapter 7 bankruptcy filing will typically be on your credit report for up to 10 years (Chapter 13 is seven years), once you receive the discharge (court order saying that you are no longer liable for the dischargeable debts listed on your petition) you can take very specific steps to rebuild your credit score. It is not uncommon to get a credit score into the 700 range within a few years after the bankruptcy discharge.
3. If I’ve been sued by a creditor, I can’t file bankruptcy to remove that debt.
If you’ve been sued (particularly by a creditor), bankruptcy will postpone the lawsuit and likely work to discharge (remove) the underlying debt, thereby ending the lawsuit.
4. If I’ve already renegotiated my debt with the creditors or a debt settlement company, I can’t file bankruptcy.
If you are still having difficulty keeping up with your new negotiated payments – a very common situation – you can file bankruptcy and get real relief from the burden of carrying that debt.
5. If my wages are already being garnished, bankruptcy can’t stop it.
When a person files bankruptcy there is a stay placed on all creditor actions. This “stay” is automatic upon the filing of bankruptcy. What this means is that most creditors are prohibited from contacting you or collecting money from you. This includes wage garnishments which will end upon filing bankruptcy.
6. If I file bankruptcy, I won’t be able to move into a new rental.
When person has filed bankruptcy there is often concern that he or she will not be able to move into a different rental apartment/house. While many property managers or landlords will check a person’s credit report when he or she applies to rent a house or apartment which will indicate there has been a bankruptcy, many will still rent to people who have received a discharge through bankruptcy.
7. If I file bankruptcy, I will lose all of my property (assets).
Many people jump to the conclusion that they will lose their car, their home, or other property if they file bankruptcy. This is rarely the case. Most Chapter 7 cases are considered “No Asset” cases because most assets a person has will be exempted (protected from liquidation). Federal and California laws allow for most, if not all, assets to be protected from being sold off. And ff you’re upside down on your mortgage (owe more than the property is worth) you will not be required to give up your house. A bankruptcy attorney is responsible for applying the various exemption laws to protect your property.
8. If I have a car loan I should pay it off before filing bankruptcy.
Many people think they should pay off their car loan(s) before filing bankruptcy. There’s rarely ever a reason to do that. In fact, by paying off a car loan you’re increasing the amount of equity you have in the car. In other words, if you have a car valued at $5000 and a loan pay off amount of $1000, you have $4000 of equity. If you pay off the $1000, you now own the car free and clear with $5000 of equity. It’s the equity (not the number of cars) that needs to be protected (exempted). California has reasonably generous exemption amounts – to protect the equity in your property. So it’s a very good idea to consult with a Bankruptcy attorney prior to paying off a car loan.
9. If I owe back taxes, I can’t get them discharged (eliminated) through bankruptcy.
Most people think that they cannot get rid of taxes through bankruptcy. However, this in not an absolute. If you owe back taxes, it may be possible to free yourself of personal liability for them especially if they are from at least 3 years back. There are very specific criteria that determine whether or not you can rid yourself of your tax debt so it’s important you discuss this when you consult a Bankruptcy attorney. Even if you owe taxes from recent years, Chapter 13 can be a way for you to spread out the payments over several years making paying the IRS or State Franchise Board a lot more manageable.
10. All of my debts will be wiped out (discharged) if I file bankruptcy.
Not all debts are dischargeable in bankruptcy. Non-dischargeable debts include child support and alimony, student loans, restitution for a criminal act and debts incurred as the result of fraud and more recently incurred tax debts (see above).