Misconceptions & Fears Of Filing For Bankruptcy

Takeaways

● The misconceptions and fears of filing for bankruptcy are unfounded.
● You will not lose everything by filing for bankruptcy.
● You will never be able to obtain credit in the future.
● Both spouses do not have to file a bankruptcy.
● The stigma associated with a bankruptcy filing is mostly imagined.
● The fictional bankruptcy police do not break into your home to list your assets or report you to the bankruptcy trustee; they do not exist. After your bankruptcy has been discharged, you are done.

I often meet with clients who are very fearful about filing for bankruptcy. Most of their concerns are misplaced.

Many people have the misconception that bankruptcy would result in some official breaking down the door of their home like a SWAT team, making a list of all their belongings and carrying them away. They imagine watching everything go: sofa, love seat, coffee table, stereo, TV, Ninja mixer, high chair, stroller…only for everything they own to be sold at a large yard sale for the benefit of their creditors. Anything is possible, but in my 42 years of representing debtors, it has never occurred to one of my clients.

Many times, (often within five minutes of meeting them), I can let clients know their bankruptcy would be a Chapter 7 asset-less bankruptcy. What this means is that, after using one’s applicable exemptions, the debtor does not have anything the Chapter 7 Trustee believes to be worth selling to repay his or her creditors.

The relief in the eyes of my clients when we go over the truth of filing for bankruptcy is unparalleled. Because the truth is, filing allows you to get a new start.

Another misconception is that, after a bankruptcy, new or retained assets can be seized.

One of my clients received his bankruptcy discharge about two years ago. He called us worried that because he had retained his assets and had created new ones, he wanted to know if he would need to let his bankruptcy trustee know about these assets. His fear was these new assets would be seized to repay his discharged debt. Not to worry – no such thing will happen.

Some other misconceptions regarding bankruptcy have to do with the concept of “the bankruptcy police.” Clients imagine that these “officers” watch you like Big Brother in George Orwell’s novel 1984. They imagine that they are just waiting to swoop in and take that car you’ve managed to buy or the house you’ve managed to maintain the payments on.

First, there is no big-brother-bankruptcy police. Even if there were, repossessing your car or house would result in decreased value of the assets, which the imaginary “police” would then have to expend time and energy to resell at a loss. The Chapter 7 Trustees do not do something just do to something. Any action taken by a Chapter 7 Trustee must be calculated to result in some benefit to a debtor’s creditors. If there is no equity in an asset beyond a debtor’s exemptions, that fact will just be confirmed by the Chapter 7 Trustee and that will be it.

As to the need to file for both husband and wife, when a person decides that they need to file for bankruptcy it is not required that their spouse do the same, and a joint filing should never simply be assumed. The debts and assets of both individuals must be carefully considered to determine whether and when a joint bankruptcy filing is appropriate.

Credit-wise, the filing of a personal bankruptcy does not signify the death knell to a person’s ability to obtain new credit post-discharge. This is perhaps the most common fear clients have about filing for bankruptcy, and it is simply not true.

In most instances, when a person needs to file for bankruptcy, usually their credit score has already been negatively impacted by their poor and declining financial situation. Depending on their situation, the filing for bankruptcy may result in actually improving a post-discharge debtor’s credit report.

Rebuilding your credit after filing for bankruptcy is not impossible. Although a bankruptcy can stay on your credit report and will limit your access to credit for up to 10 years from the date of filing, you may receive credit card offers within a few months after your bankruptcy is concluded. While these typically will come with higher interest rates and low credit limits, used properly (and by that, I mean paying in a timely fashion) they can help you rebuild your credit score following a bankruptcy. Most people find that their credit score has increased into the “good” or even “excellent” range as early as two years after their case is discharged. Post-discharge anything is possible.

As to purchasing or refinancing a home, because most mortgage lenders and insurers require that you wait a minimum of two years after discharge before you apply, it is important to focus on re-establishing good credit during that two-year waiting period.

The belief that after receiving your bankruptcy discharge you will be forced to wear a scarlet “B” on your clothes, could not be further from the trust. When I was a young lawyer forty years ago, there were indeed bankruptcy game players; those who used the system for their benefit. In the last three decades, however, most people filing for bankruptcy are not profligate spenders, but those who have lost their sources of income, been down-sized, faced staggering medical bills without insurance or perpetually unemployed. While the filing of a bankruptcy is a matter of public record, unless you tell someone you have filed for bankruptcy, people will never know. You have to look at the filing of a bankruptcy as a business decision, nothing more, nothing less.

The only things you need to provide for the bankruptcy court are…

● A copy of your most recent federal tax return;
● Pay stubs;
● And an appraisal of your house;
● A copy of your recorded homestead;
● Blue book value of your car(s).
● Cash value of any insurance policies.
● Any stock or bonds that you may own.

Once your bankruptcy is declared a no asset case and you receive your discharge, you are done…

● You are not going to lose your home provided you continue making the mortgage payments.
● No one is going to come to list and evaluate your assets.
● You will have received that “fresh start” contemplated by the Bankruptcy Code.

You should immediately contact a bankruptcy attorney if…
● Your home is under threat of foreclosure.
● Your wages are going to be garnished.
● The IRS is threatening to take action against you for unpaid taxes or unfiled tax returns.
● Your landlord is threatening to evict you.
● You are the subject to a lawsuit threatening an real estate or bank attachment.

For more information on Misconceptions And Fears About Chapter 7, an initial consultation is your best next step. Get the information and legal answers you’re seeking by calling (978) 922-8440 today.