Several myths are so prevalent that they are set forth below along with what I consider to be the actual truth of the matter. When asked where they obtained their information, the usual reply is somewhere along the lines of, "A friend told me," or "That's what I've heard." Unless your friend is an experienced bankruptcy attorney, bankruptcy judge, or bankruptcy trustee, you may want to take their advice or comments with a grain of salt.
Remember that each bankruptcy case presents a unique set of facts and circumstances warranting individualized attention. The following is not intended to be legal advice.
- Filing Bankruptcy will ruin my credit for 10 years.
- My employer will fire me if I file bankruptcy.
- I will still have to pay back my debt in a Chapter 7.
- The judge will take all my property if I file bankruptcy.
- I will not be able to get a job if I file for bankruptcy.
- I will not qualify for new credit after bankruptcy.
- I will lose my house if I file bankruptcy.
- I will lose my car if I file bankruptcy.
- I will never be able to buy a house after filing bankruptcy.
- Everyone will know that I filed bankruptcy.
- I will have to pay debt forgiveness taxes on discharged debt.
Filing Bankruptcy will ruin my credit for 10 years.
Bankruptcy will be reflected on your credit report for ten years. That does not mean your credit is "ruined for ten years" or that you will never be able to obtain credit again.
Usually your credit is already ruined before you see a bankruptcy attorney. In most cases, our clients' credit scores will actually increase 65 - 130 points within one year of obtaining a Chapter 7 Discharge. This is in part due to the fact that credit reporting agencies must change your credit report to reflect that all discharged debt now has a $0 balance, rather than the former Balance Due. Since you no longer owe anybody money (other than certain priority debts such as child support, recent taxes or reaffirmed secured debt) coupled with the fact that you cannot file chapter 7 again for 8 full years, you become a low risk borrower upon discharge.
Be careful, as creditors make no profit off of you unless they are charging you interest, late fees, over the limit fees, balance transfer fees, cash advance fees, ATM fees, etc. Knowing you are "fresh bait" after discharge, devious creditors will actually solicit you with "Welcome Back" offers, often pushing pre-approved unsecured credit in your face to get you "back into the swing of things".... making them rich at your detriment.
My employer will fire me if I file bankruptcy.
It is illegal for an employer to fire you solely for filing bankruptcy. If you were fired and can prove that it was because you filed bankruptcy, you would have a great lawsuit against your employer.
I will still have to pay back my debt in a Chapter 7.
Unsecured debt is eliminated entirely and never has to be paid back. Some debts are non-dischargeable by their very nature, such as child support, spousal support, recent taxes, toll road fines, government fines, damages as a result of injuries inflicted while intoxicated and a few others that "the people" have determined are so important that they should not be eliminated.
The judge will take all my property if I file bankruptcy.
First of all, the vast majority of our clients will never even see a bankruptcy judge. This is because 99% of Chapter 7 cases are uneventful. A Trustee is appointed to review your bankruptcy paperwork to see if there is any unprotected property that he or she can liquidate. Liquidation rarely takes place. This is because by the time a bankruptcy case has been filed, most debtors have already liquidated their assets themselves in an effort to pay off their debt and avoid bankruptcy. Do not transfer assets on the eve of filing bankruptcy without first discussing it with your bankruptcy attorney.
I will not be able to get a job if I file for bankruptcy.
Some employers may draw inferences as to your character from the fact that you filed bankruptcy, especially high security jobs. If you are actively interviewing, you ought to be forthright and honest with your potential employer and ask them flat out which would be more detrimental, a bankruptcy and no debt, or a mountain of unpayable debt and no bankruptcy. They will appreciate your honesty up front.
Finally, it is usually more difficult to get a job when you owe tens of thousands of dollars in unsecured debt. The argument is that someone burdened with extraordinary debt and hounding bill collectors is more likely to give in to the temptation of embezzlement or theft than someone who is debt-free.
I will not qualify for new credit after bankruptcy.
Believe it or not, the opposite is true. Here is how it works: when you file bankruptcy, Experian, Equifax, and TransUnion are automatically and instantly notified, as are all creditors who maintain relationships with those credit bureaus. Creditors (whether yours or not) make note of your filing first to see if you are one of their debtors, and second, to make sure you receive your discharge in about four months. Once you receive your discharge, many creditors will actually solicit you to become a cardholder again. After all, you are debt free and cannot file chapter 7 again until eight full years have lapsed. If you default in the interim, they can sue you, garnish wages, levy accounts, etc. They have nothing to lose, except their almighty dollar if they cannot get you back into the debt-trap.
I will lose my house if I file bankruptcy.
If you are current on your house payments (and said payments are "reasonable") and your equity is protected, you will not lose your primary residence.
I will lose my car if I file bankruptcy.
If you are current on your reasonable car payment, your equity is protected, and you "reaffirm" the debt when required, you will not lose your car. If your car is paid off and the equity is protected, you will not lose your car. However, if you are making a $1,900 payment on a fat BMW and have another car in the driveway and motorcycle in the garage and a boat in storage, you will have to surrender your luxury car. Again, consider the totality of the circumstances and ask, "Does this make sound economical sense?"
I will never be able to buy a house after filing bankruptcy.
How long is it going to take to pay off your existing debt AND save money for a down payment? The usual answer is "eternity". If you discharge as much debt as possible now, and save for the next two years, how much money will you have for a down payment? The real estate and lending markets are in turmoil right now. Hundreds of thousands of homes are foreclosing and entering the market right now. So, if you have an adequate down payment, the fact that you filed bankruptcy will only help you to the extent that it allowed you to eliminate all of the debt that was preventing you from buying a home in the first place.
Everyone will know that I filed bankruptcy.
Bankruptcy filings are matters of public record. So, whoever really wants to know if you filed bankruptcy could take a special trip to the court where your case was filed, sit down at the court's computer and attempt to look you up. Or, if they go through the trouble of setting up online access to the court's database, they could perform a search there. Unless you are filing a business bankruptcy, your personal bankruptcy will not be published anywhere other than the Court's system. Creditors who subscribe to the reporting bureaus will find out since they are all interconnected.
I will have to pay debt forgiveness taxes on discharged debt.
No way. Surrendering a home in bankruptcy could result in non-dischargeable capital gains taxes in some circumstances (check with your tax advisor).
