Bankruptcy Myths | Facts vs. Fiction in Bankruptcy
Bankruptcy Myths…BUSTED! Foster Law Offices breaks down the most common bankruptcy myths; tall tales dealing with debt that creates unnecessary fear among our clients when filing bankruptcy. We invite you to view the various myths below, and the see for yourself why they call us Mr. Debtbuster!
Myth: If you have been SUED by a creditor it is TOO LATE to file for bankruptcy.
Truth: Bankruptcy will immediately STOP a lawsuit, foreclosure, sheriff sale, levy and/or wage attachment. The Automatic Stay under section 362 of the Bankruptcy Code is a very powerful provision. This Section of the Bankruptcy Code directs all creditors of a debtor to cease collection actives. There is very little “wiggle room” or exception to this section of law, meaning that it routinely stops a lawsuit or judgment collection in its tracks.
Myth: Debt Consolidation companies are better than bankruptcy.
Truth: Most debt consolidation companies are SCAMS, ruin your credit and ultimately FAIL. Not all debt consolidation companies are scams, but good luck finding the ones that are legit. There is very minimal regulation on these companies and there are new businesses “popping up” seemingly overnight. Normally, I see that by the time my clients figure out that the company is not doing what was promised, several thousand dollars is lost. Bankruptcy is much more certain and there is no “scam” involved. Attorneys are heavily regulated by the courts and other administrative bodies, to protect YOU.
Myth: There is a debt "minimum" necessary to file for bankruptcy.
Truth: There is NO debt “minimum” necessary to file for bankruptcy. A small amount of debt can become a problem if neglected.
Myth: Bankruptcy ruins your credit for seven years or longer.
Truth: In most cases, bankruptcy will actually IMPROVE your credit. Lingering delinquent debts will drag your credit score down for years. Ignoring the situation certainly does not make the matter any better. Filing for bankruptcy normally improves your debt to income ratio and usually makes new, small lines of credit available following the conclusion of a case. A debtor can use this NEW CREDIT wisely to improve credit in a fairly short period of time, usually much less than seven years.
Myth: You can't afford to talk to an attorney.
Truth: Initial consultations are FREE. Foster Law Offices provides payment plans for just about everyone; including those on a fixed income. We have worked with thousands of debtors in the past and have done everything possible to create a payment plan to help our clients manage their legal fees. Foster Law Offices is pleased to offer our clients reasonable and flexible payment options to meet their unique needs. The biggest obstacle to making this work is scheduling a free consultation with our office, where we can speak to you one-on-one about your unique financial situation, provide you with in depth information regarding legal fees and payment options personalized to your situation.
Myth: When married, the bankruptcy filing of one spouse will ruin the credit of a non-filing spouse.
Truth: Fortunately the Bankruptcy Code permits an individual spouse to file bankruptcy without the need for the other spouse to “join in” on the filing. Not only, can the filing spouse eliminate individual debt, but the non-filing spouse’s credit should go unaffected. The key is that the filing spouse must have only individual debt. Joint credit cards can create problems in this scenario. (This is different from an authorized user scenario) This situation would have to be reviewed thoroughly by an attorney. Akin to this “myth”, a bankruptcy filing by an individual before marriage will not effect the credit of a new spouse.
Myth: Medical bills cannot be discharged in bankruptcy.
Truth: Medical bills, credit card bills and personal loans CAN be discharged in bankruptcy. This myth is extremely common and couldn’t be farther from the truth. The Federal Bankruptcy Code does NOT designate special treatment in bankruptcy for medicial bills. So let’s put this myth to rest, YES medical bills CAN be discharged in bankruptcy.
Myth:If you filed bankruptcy before, you cannot file again.
Truth: In some instances, the bankruptcy law will permit a new discharge in as little as four years. Changes made to the bankruptcy law in 2005, created a scenario where debtors can seek Chapter 7 relief once every eight years. However, debtors can seek Chapter 13 relief in only four years following a Chapter 7 bankruptcy, if neccesary.
Myth: You can lose your job due to bankruptcy.
Truth: Federal law (11 U.S.C. Sec. 525) prohibits any employer from discriminating against you because you filed bankruptcy. This is a VERY common QUESTION, but it rarely plays out in the “real world”. I have represented thousands of debtors and have NEVER seen someone fired for a bankruptcy filing. So, I’ve never even employed the use of 11 U.S.C. Section 525. In reality, an employee that has filed for bankruptcy has much LESS temptation to misappropriate funds or anything of that nature, as they are being relieved of personal financial pressure. I would argue that you are a BETTER employee following a bankruptcy, as you can now truly focus on your job rather than worrying about the mountain of debt and creditor calls that exist in your personal life.
Myth: You must be behind on your bills to file for bankruptcy.
Truth: Even if you are making the minimum payment on your bills, you are not “fine”. Credit Card companies have set you up to fail. Paying minimum payments is only a “band-aid” for the real problem. The problem is, by the time you realize you are in a “credit trap”; it is too late to recover. Most of my clients have struggled for YEARS before they sought real help.
Myth: Bankruptcy represents failure, and is only for irresponsible people.
Truth: Bankruptcy is a FRESH START, it helps GOOD people get out of BAD situations. My past clients routinely want to convince me that they are good people, not “scam artists” at the initial consultation. The truth is, I have no preconceived notion of my clients. I look at bankruptcy as a “business decision” to protect your family and provide a fresh financial start. Bankruptcy is NOT a reflection of your character, but rather an option available under the law for families to obtain debt relief.
Myth: You will never get a loan again after bankruptcy.
Truth: Our past clients have been sent offers to finance vehicles and the like immediately after the case is complete. After a bankruptcy case is complete, a debtors debt-to-income ratio is logically much better. In other words, there is slightly more disposable income available and post-bankruptcy debtors are in a much better position to responsibly borrow and finance. Post-Bankruptcy debtors can use this available credit to rebuild MUCH FASTER than you may think.
Myth: It is more difficult to file bankruptcy after the 2005 law changes.
Truth: Changes to the Bankruptcy Code in 2005 didn’t have the “bite” the United States Congress intended. The majority of the laws operate the same as they did pre-2005. The “new laws” were drafted to prevent fraud changes and were geared to prevent bankruptcy abuse. However, the relief that was available prior to 2005 is STILL available. The “qualifying factors” surrounding a bankruptcy did not change very much after the law changed. The rumors swirling around the 2005 law changes still exist. It is imperative that you get accurate information before you can make an informed decision regarding bankruptcy.
Myth: My bankruptcy will be in EVERY newspaper and "EVERYONE" will know.
Truth: This practice is a bit dated, but is still done in the Erie Times-News. Most other smaller papers in the surrounding counties DO NOT publish the bankruptcy filings. So, if you live outside of Erie County you are “safe”, so to speak. That said, I think that my new bankruptcy clients make far too much out of the issue than what its worth. The listing is done ONCE and it is VERY small. A very minor price to pay for the relief and piece of mind that will follow the bankruptcy filing. I have represented thousands of debtors and I have yet to have a client regret a bankruptcy filing due to the listing in the Erie Times-News.
Myth:You will lose everything you own when you file for bankruptcy.
Truth: In most cases, you can keep your home, vehicles, household goods and pension. The Bankruptcy laws provide specific “exemptions” or “protections” for most basic possessions. In general, proper exemption planning will allow you to retain your basic assets to enable a true fresh start.
Myth: Creditors can continue to harass you after bankruptcy.
Truth: Once bankruptcy is filed, creditors are NOT permitted to contact you for ANY reason. Section 362 of the Bankruptcy Code is very specific as to creditor harassment in bankruptcy. All calls, mail, electronic mail (e-mail), lawsuits and general harassment must STOP when the case is filed electronically (immediately). If not, creditors can face SERIOUS sanctions, otherwise.
Myth: If you can't afford to pay creditors, you can't afford to pay an attorney.
Truth: Foster Law Offices has payment plans available to fit just about anyone’s means. Initial consultations are FREE. In our experience, the worst thing a family can do is obtain legal advice from the internet, co-workers, family or friends. This tends to make the situation more difficult emotionally and often we find that some of the information is not accurate. You can get the facts and take the fear out of bankruptcy with a free consultation that is private and personalized to your unique financial situation.
Myth: Creditors can continue to harass you after bankruptcy.
Truth: Once bankruptcy is filed, creditors are NOT permitted to contact you for ANY reason. Section 362 of the Bankruptcy Code is very specific as to creditor harassment in bankruptcy. All calls, mail, electronic mail (e-mail), lawsuits and general harassment must STOP when the case is filed electronically (immediately). If not, creditors can face SERIOUS sanctions, otherwise.
Myth: You should cash in your 401k or retirement plan before filing for bankruptcy.
Truth: Retirement funds are “exempt” or protected in bankruptcy. Believe it or not, there is no “limit” to the exemption, meaning that a debtor can retain the retirement funds so long as they remain within the retirement account. If you decide to draw upon your retirement funds prematurely to pay creditors it could: (1) have serious income tax ramifications and (2) jeopardize your financial future. Pulling retirement monies out can be very expensive as taxes and penalties must be paid on the withdraw. Many people that do such are stunned by the tax owed at the end of the year, long after the monies are gone, hence creating yet another headache now with the IRS. With the future of Social Security in jeopardy, financial planning for your future is more important than ever.