Myths Of Bankruptcy
1. Bankruptcy is no longer available.
This is false. Many people believe that the Bankruptcy reform of 2005 eliminated bankruptcy. Congress merely redefined the rules that apply to bankruptcy. Bankruptcy still provides relief to the majority of debtors in financial distress.
2. Bankruptcy is available but is hard to file.
Generally, this is false. The bankruptcy reform has made filing for bankruptcy less attractive to wealthy Debtors who are looking for an easy way out while retaining luxury types of property. For the majority of bankruptcy filers, not much has changed for all practical purposes. The Debtor does have to take debt counseling and education, cannot as easily file bankruptcies repeatedly, cannot cram down the value of recently purchased property such a vehicle, and cannot fix the failure to file tax returns like was possible before the reform. However, this is proving not to be much of a hindrance to the average consumer in need of bankruptcy protection.
3. A Debtor can eliminate the Debt on house, vehicles, and furniture, etc. and keep the property.
This is false. The Debtor typically has the choice of keeping property and paying for it or surrendering the property to the creditor and discharging the debt.
4. A Debtor can run up debts with the intention of discharging them in bankruptcy.
This is false. Running up debts knowing that the Debtor does not have the means of repaying the debt with the intention of discharging the debt in a bankruptcy is bad faith and can result in a denial of the discharge sought by the Debtor. It may be possible to borrow money prior to the filing of a bankruptcy if you intend to reaffirm and repay the debt. However, this should generally be approved by the creditor before the loan is obtained.
5. A Debtor will lose all property if a Bankruptcy is filed.
This is false unless you only have property securing loans and you cannot pay any of the loans. Most state law provides certain exemptions that allow a Debtor to keep household goods, vehicles, houses, etc. Furthermore, most retirement plans are exempt and the Debtor can keep those. The Debtor’s attorney should advise the Debtor of assets that are exempt, assets that are not exempt and assets that are questionable.
6. All Debts are discharged in Bankruptcy.
This is false. The Bankruptcy Code provides that certain debts are not dischargeable in bankruptcy and that all other debts are dischargeable. The types of debts that are generally non-dischargeable are alimony, child support, certain taxes, and student loans.
Furthermore, debts are not discharged if the Debtor fraudulently transfers assets out of its name to avoid paying debts, perpetrates fraud on the Bankruptcy Court, fails to abide by an order of the Court, fails to fully disclose information required by the Bankruptcy Code or Court, or has previously received a discharge within the time prohibited by the Code for filing another bankruptcy.
7. A Debtor cannot discharge taxes in Bankruptcy.
This is false. Certain income taxes can be discharged. Generally, income tax debts that are over three years old are dischargeable. However, the rules for determining what constitutes three years and whether the time was tolled (extended) for any reason are very complex and an attorney should be consulted to determine which taxes would be dischargeable if a bankruptcy was filed or if it would be beneficial to wait to file.
8. A Debtor cannot obtain credit after Bankruptcy.
This is false. There is nothing that prohibits a Debtor from obtaining credit once the bankruptcy case is finished and the discharge is granted. However, it is up to the individual creditor to determine if it will grant credit to a Debtor after Bankruptcy, and if so, how much interest will be charged.
9. A Debtor can only file Bankruptcy once.
This is false. Generally, a Debtor can only file a Chapter 7 once every eight years. A Debtor can file a Chapter 13 when needed, but there are certain rules that govern whether the automatic stay will be in effect and whether a discharge will be granted at the end of the Chapter 13 case. Circumstances exist where a Chapter 13 can be beneficial to reorganizing debts and a discharge is not needed at the end.
10. A Debtor’s name will be published in the local newspaper if Bankruptcy is filed.
Although this is theoretically possible, it is generally false. To print the names of everyone that files bankruptcy would be too voluminous and newspapers are not generally willing to devote so much space to it. The Debtor’s name will appear in credit reports that are circulated among the banks and financial institutions, but generally, no one will know about the Bankruptcy filing unless the Debtor tells someone.
11. It is immoral to file Bankruptcy.
This is false, if the filing complies with the Bankruptcy Code. Bankruptcy is a legal proceeding provided by the Constitution and Congress. It is difficult to argue that availing oneself of available legal remedies can be considered immoral. However, it can be argued that if money is borrowed it should be paid back. This, however, is a simplistic approach to a very complicated issue. Sometimes bad things happen to good people. What happens when someone loses their job, has major medical issues, or someone else does not pay them what is owed? These are all circumstances beyond the control of the Debtor. To tell such a person that filing a bankruptcy is immoral is the same as proposing to hold that person in a quasi debtor’s prison which itself has been deemed immoral. On the other hand, there is no doubt that using the Bankruptcy Court to perpetrate fraud is immoral.
12. A Debtor can choose which creditors to list in the Bankruptcy.
This is false. All creditors, including family members and friends, must be listed in the Bankruptcy petition and schedules. Not listing them all intentionally may constitute bankruptcy fraud. It is possible for a Debtor to reaffirm and pay certain debts after the Bankruptcy is filed and it is possible to keep secured creditors such as for a vehicle or home and to discharge the rest. There are certain Bankruptcy laws that prohibit a Debtor from paying off family members and other insiders within a year of filing bankruptcy and other creditors within 90 days of filing to the exclusion of similarly situated creditors. These are called preferential transfers and it is possible for a Trustee to recover these payments from the creditor that received the payment.