Common Bankruptcy Myths


There are many misconceptions about bankruptcy which continue to circulate without merit.  For many people, bankruptcy is an option which makes sense to regain their credit while saving their home, car and other personal items.  Some of the following bankruptcy myths are as follows:

Myth – If I file a Chapter 7 bankruptcy, I cannot keep my home, car, or other personal items.

Truth – In most cases, people who file a Chapter 7 bankruptcy can keep all personal items.  In fact, prior to a filing, only those items which are of net value above those that are allowed to be exempted under the Bankruptcy Code are subject to Bankruptcy Court jurisdiction.  Of course, we will know beforehand if you are a candidate for a Chapter 7 bankruptcy (total discharge) and if you are a candidate, you will be able to keep all personal items as well as your home and car.  If there are secured loans on your home and car, you can keep making those payments while retaining the items.

Myth – Under bankruptcy law changes in 2005, there must always be a repayment plan.

Truth – There were massive bankruptcy changes to the Bankruptcy law known as BACPA in 2005 which made numerous changes to the Bankruptcy Code.  However, the great majority of people who qualified for a Chapter 7 bankruptcy prior to the law changes still qualify for a Chapter 7 bankruptcy and therefore can discharge all unsecured debt while almost always retaining all of their personal items.  Certain higher income people may now be required to file under a Chapter 13 bankruptcy which would require a small monthly payment towards unsecured creditors.  Any of the qualified attorneys at Young, Marr & Associates can fully evaluate your situation to determine if you still qualify for a Chapter 7 bankruptcy.

Myth – If I file for a bankruptcy, I will never be able to restore my credit.

Truth – While certain individuals will find it more difficult to obtain credit after filing, many people in fact restore their credit quickly following a bankruptcy.  Often, in as little as six months or less, you may be able to take out a car loan at normal or close to normal interest rates.  You will be able to take out a mortgage loan in as little as two years after filing.  Remember, if your credit is already damaged prior to your filing of a bankruptcy, the bankruptcy may often increase your FICO scores since your income to debt ratio immediately improves following a bankruptcy filing.

Myth – I cannot file a Chapter 7 bankruptcy if I wish to keep my home or car.

Truth – While everyone does not qualify for a Chapter 7 bankruptcy, if you qualify and you remain current on your mortgage and car payments, you may keep those items as well as all other personal items which would be fully exempt.

Myth – If I’m married and I wish to file bankruptcy, it will negatively impact my spouse.

Truth – While a married couple may file jointly, a married person may file individually, and in that circumstance, the non-filing spouse is not affected by the filing.  While it is necessary that their income be obtained for purposes of compiling the petition, their name will not appear on the petition nor will their Social Security number.

Myth – My employer will be notified of my bankruptcy.

Truth – Employers are not notified of either a Chapter 7 or a Chapter 13 bankruptcy filing.

Myth – If I’m in a position of security such as a police officer, bank teller, etc., I will not be able to retain my position.

Truth – Over the years, I have represented individuals who have been doctors, lawyers, police officers, government employees, security guards, and other positions of security and prominence.  Remember, bankruptcy is not a crime and is rather something that is allowed to help people regain, restore and maintain credit.  Therefore, it is my suggestion that if someone is concerned about the effects bankruptcy may have on their employment, they may speak directly to their personnel department.  However, it has been my experience over the years of representing debtors that bankruptcy has had little to no effect on current employment status.

Myth – If I file bankruptcy, I will lose any tax refund owed to me by the IRS.

Truth – In the event that you owe back income taxes, the government may take any income tax refund and apply it towards your delinquent taxes.  However, if you are entitled to a tax refund and do not owe back taxes, you will be entitled to keep your tax refund as long as the amount of tax refund does not total more than you are allowed in personal exemption, taking into account all of your other personal property.  Also, bankruptcy has no impact on your taxes in that it is not considered forgiveness of a debt.