Top 10 Misconceptions About Bankruptcy

There are many misconceptions surrounding bankruptcy proceedings and the consequences of filing. The intent of this article is only to provide information, and should not be taken as legal advice. If you need assistance you are advised to contact a bankruptcy attorney to help you get through the process.

Here are the top 10 misconceptions about bankruptcy:

The Debtor Must Be Insolvent to File for Bankruptcy

With a few limited exceptions the only condition required to file for bankruptcy is for the debtor to be unable to pay their bills, often referred to as “financial distress.” If debtors had to be broke they would not be able to file for bankruptcy as they couldn’t pay their attorney, and by law bankruptcy filers must be represented by counsel. However, the amount of cash and property a debtor can have left over after bankruptcy varies by state.

Bankruptcy Will Ruin Your Credit

While it is true that your credit score will take a hit and the filing will stay on your report for 10 years, filing for bankruptcy will not prevent you from qualifying for credit. An individual can only file for bankruptcy once every eight years for Chapter 7 cases and every six years for Chapter 11 or 13 cases, lenders will consider providing credit to you because they know you won’t be able to get out of the loan by filing again.

Filing for Bankruptcy Will Prevent Me from Buying a House

Banks will take risks with those who have filed bankruptcy, provided they have a sufficient down payment. The amount each mortgage lender will require down will vary, and there will be a higher interest rate attached to the loan. Another main consideration here is the house is on the line if you do not pay the mortgage the lender can recoup funds by repossession of the home.

If I file for Bankruptcy I Will Lose My House

Most often this is not the case. While in some situations creditors can seek recovery through trying to take a house, in most states and in most cases the “Homestead Exemption” will protect your main residence.

Back Taxes Can’t be Discharged in Bankruptcy

Some taxes, like personal income taxes that are over three years old, can be discharged if certain conditions are met. The Bankruptcy Code’s conditions pertaining to taxes are very complex and will vary depending on what chapter the bankruptcy is filed under; 7, 11, or 13.

Student Loans are Never Dis-chargeable

While this is generally true, there are some exceptions. Specifically, if the debtor can demonstrate excessive and legitimate hardship student loans can sometimes be eliminated during bankruptcy.

All Creditors Must be Listed

One of the criteria when filing for bankruptcy protection is that all creditors must be treated equally. In some cases, if a creditor is left off the filing in error you may still be covered, but not always. You should never treat creditors differently and if a debtor decides to pay off a specific creditor the debtor is prejudicing the creditors that won’t receive payment and the court will see this as an act of fraud.

By Listing All creditors I Will be Cheating a Family Member or Friend

Although all creditors must be listed, in some situations the debtor can reaffirm their debt, subject to court approval. Generally this is done to preserve a business, or personal, relationship.

I Signed a Non-discharge Bankruptcy Waiver

This is simply a scare tactic. While the “Bankruptcy Reform Act of 2005” has revised this provision, legal remedies still exist.

I Will Get Fired for Filing Bankruptcy

Nothing is further from the truth, as the law prohibits you from being fired for filing for bankruptcy.