Declaring bankruptcy isn’t something most people want to think about, whether for personal or business reasons. But the reality is that sometimes it’s necessary – and it may even be your best option when debt mounts.
There are myriad misconceptions about bankruptcy, many of which can prevent someone from seeking relief. These are 10 common misconceptions and the truth about them. We’ll be covering each of these in more depth in future posts, but if you have questions in the meantime you can contact us for a free consultation and let us put your mind at ease.
1. I’ll Lose Everything If I File For Bankruptcy.
People often believe that declaring bankruptcy means they’ll lose their house and car. With a looming threat like that, no wonder they’re hesitant to consider the option.
Bankruptcy laws are complex, but there are instances in which you won’t lose your house and it depends on the Chapter you file.
In Chapter 13 bankruptcy you will not lose your house. Chapter 13 is designed to save your home from foreclosure and eliminate second mortgages when possible.
In most qualifying cases of Chapter 7 bankruptcy you won’t lose your house, either. It all depends on how much income and equity you have. Since each Chapter of bankruptcy has its own requirements, your attorney can help you choose the best option for your situation.
Is your home underwater? Then you won’t have it taken from you because it’s not considered a high enough value. But even if you have too much equity to meet exemption requirements, you still have options. They key is to understand your needs and match them with the right solution.
Similar rules apply for your car. New Jersey follows federal exemption laws, which provide for you to retain a certain amount of equity in your vehicle. Are you over the limit? Again, you still have options.
Other assets that are protected in bankruptcy include your pension, 401k and social security.
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2. All My Debts Are Wiped Out In Chapter 7 Bankruptcy.
Bankruptcy laws offer options but there is certainly no “blank check” that covers all of your debt.
One of the debts that is not forgiven in bankruptcy are student loans unless you can demonstrate a severe case of hardship resulting from a disability that is preventing you from working altogether. Since this is an uncommon scenario, you should be prepared to pay back your student loans.
Other debts that are not dischargeable include child support, alimony and criminal fines or penalties.
New Jersey state taxes are only dischargeable if they are filed and owing for at least three years.
Commonly discharged debt includes mortgages, home equity lines of credit, credit cards, personal loans, car loans and medical bills.
3. Everyone Will Know I’ve Filed For Bankruptcy.
This one is a bit of a gray area. While bankruptcy becomes part of public record and can be discovered, it is not posted in any newspaper or publication, nor are any signs posted to your car or home.
You may have a sign posted to your home in the event of foreclosure, but that’s another issue and it’s unrelated to bankruptcy.
4. I’ll Never Get Credit Again.
Bankruptcy stays on your credit report for 10 years but that doesn’t mean you can’t get credit in the meantime.
Typically it takes six months to reestablish credit and your best bet is to accept one of those frequent credit card offers you receive in the mail. The credit line will be low and the interest rate high, but if you use the card to make small purchases, such as gas or groceries that you can pay back in full each month, you will begin to restore your credit.
In fact, filing for bankruptcy is better for your credit than falling into overwhelming debt that takes you 10 or 20 years to pay back. In our experience, clients are often back at a credit score of 700 within three years.
5. If I’m Married, My Spouse Has To File For Bankruptcy, Too.
If you share debt or need to achieve the full exemption allowable in order to keep your house, you may choose to file joint bankruptcy. The decision is part of whatever strategy will work best in your situation.
But often, if one spouse files for bankruptcy it’s more beneficial if the other doesn’t. That will preserve the non-filing spouse’s credit, which may be a lot more helpful in the short term.
Either way, the law takes into account both incomes when determining eligibility and your ability to pay back debts.
6. People Who File Bankruptcy Are Financially Irresponsible.
On the contrary, people who file bankruptcy most often find themselves in this difficult situation after a job loss, divorce or death of a spouse.
After the recent economic collapse of 2008, many otherwise financially sound families found themselves in the unfortunate position of losing entire incomes. Those scenarios can be difficult to recover from.
In fact, it’s illegal to simply run up credit card debt and then file bankruptcy, so there are protections in place to prevent abuse. The bankruptcy laws are ultimately designed to protect people from the overwhelming crush of debt and help them take control of their finances again.
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7. I Can’t Get Rid Of Back Taxes Through Bankruptcy.
Taxes can be discharged but they must be filed and owing for more than three years. If you haven’t filed your taxes, you must do so immediately because that’s when the clock starts ticking.
Certain taxes, however, are not dischargeable and they include payroll, New Jersey income tax and worker’s compensation.
8. I Filed Bankruptcy In The Past And You Can Only File Once.
This depends in part on the Chapter you filed. In Chapter 7 bankruptcy you can file again 8 years from the date of your last successful filing. In Chapter 13 bankruptcy you can file again 2 years after a successful discharge.
If the bankruptcy was not successful there are different refiling dates, as well as different refiling dates if you’re filing a different Chapter than you did in the past. These are all things your attorney can help you determine.
9. I Will Lose My Job Or Have A Hard Time Finding A New Job If I File Bankruptcy.
The law states that an employer can’t discriminate by firing or refusing to hire you for reasons of bankruptcy.
Unfortunately, the reality is that you’re not likely to be able to prove why you lost a job or were turned down for one even if you think it’s related to bankruptcy.
If your employer runs your credit report, the bankruptcy will show up, so you’ll want to be prepared to explain any extenuating circumstances, like a job loss or other crisis.
10. I Can Max Out All My Credit Cards Prior To Filing Bankruptcy And Never Have To Pay Them Back.
As we mentioned earlier, this is illegal. In fact, the law says that you can’t file bankruptcy within 71 days of your last credit card charge unless it was for a necessity like gas or food.
Bankruptcy laws are designed to protect people who need financial assistance while avoiding fraud.
If you still have questions about personal or business bankruptcy, if you’re concerned about repercussions or aren’t sure what you qualify for, contact us for a consultation and we’ll guide you through the complexities, put your mind at ease and work on your behalf for the best possible outcome.