Common Bankruptcy Myths

Many people struggling with overwhelming debt are concerned about how a bankruptcy will affect them. They get bad advice from family and friends. They search the internet and find conflicting information. There are many misconceptions that people wrongly believe are correct and keep them from filing from bankruptcy and getting a fresh start. Below is a list of some common misconceptions.

I Won’t Be Able to Get Credit After I File for Bankruptcy.

This is one of the most common concerns I hear from individuals considering filing for bankruptcy relief. They worry that they will not be able to obtain financing for a vehicle or a home for up to 10 years after filing for bankruptcy. This is just plain wrong. The truth is that you will have access to credit after filing for bankruptcy. You will receive offers for vehicle financing soon after filing a Chapter 7 bankruptcy. You will generally qualify for a home mortgage within 1-2 years after receiving your Chapter 7 discharge. When you file a Chapter 13 bankruptcy, you will generally qualify for a refinance of your current mortgage or the purchase of a new home 12-24 months after the confirmation/approval of your Chapter 13 Plan. You can also obtain vehicle financing during a Chapter 13 bankruptcy. Just be aware that you will need to obtain court approval to incur new debt during a Chapter 13 bankruptcy. Overall, your credit score will generally improve after filing a bankruptcy. It may take some time but be patient and review your credit report regularly.

A Bankruptcy Will Ruin My Credit Score for The Rest of My Life.

A Chapter 7 bankruptcy will stay on your credit report for up to 10 years. A Chapter 13 bankruptcy will generally stay on your credit report for about 7 years after filing the case. Although a bankruptcy will be a negative factor in your credit score, it will not be the only factor. Your credit score consists of your payment history (35%), the amount of debt you owe (30%), the length of your credit history (15%), the mix of credit you have (10%) and the amount of new credit (10%). A bankruptcy will wipe out the debts and negative credit reporting allowing you to rebuild your credit and get a fresh start.

I Will Lose My Retirement Savings if I File for Bankruptcy.

Many individuals fear that they will lose their nest egg and not be able to retire comfortably if they file a bankruptcy. Some borrow against their retirement accounts or liquidate them to pay their creditors. This is generally a bad idea. The truth is that your retirement savings are protected from creditors inside and outside of a bankruptcy as long as they are an ERISA qualified account. Your IRA, ROTH IRA, 401k, pension, and other such accounts are protected. Don’t borrow against them or liquidate them to pay creditors without speaking to a bankruptcy attorney first.

A Chapter 13 Bankruptcy Will Require Me to Repay All of My Debts.

The truth is that most Chapter 13 bankruptcies repay very little to your unsecured creditors—pennies on the dollar. The amount you ultimately repay will depend on your income, allowable expenses, value of any non-exempt property/assets and the amount and types of debt you have. You should speak with an experienced bankruptcy attorney to determine how much your creditors would receive in a Chapter 13 case.

I Will Not Be Able to Get Rid of My Back Taxes in A Bankruptcy.

The truth is that you can discharge most federal, state and local income taxes in a bankruptcy provided they are more than 3 years old. However, a bankruptcy does NOT allow a business owner to get rid of withholding or sales taxes, no matter how old they are.

I Cannot File a Bankruptcy Because I Filed One in The Past.

You are not limited to a single bankruptcy filing in your lifetime. There are minimum time periods between bankruptcy filings. The limitations depend on what chapter of bankruptcy you filed previously and the chapter of bankruptcy you want to file now. The minimum time periods between bankruptcy filings are:

Chapter 7 Bankruptcy to Chapter 7 Bankruptcy—8 Years

The time period is measured from the filing date of the first case to the filing date of the second case: not the discharge date.

Chapter 7 Bankruptcy to Chapter 13 Bankruptcy—4 Years

This can be an option if you filed a Chapter 7 to discharge your unsecured debts but need time to payoff non-dischargeable debts such as past due child support or newer tax debt. You can file earlier than 4 years, but you will not receive a discharge.

Chapter 13 Bankruptcy to Chapter 7 Bankruptcy—6 Years

The time limit can be waived if your prior Chapter 13 repaid 100% of your unsecured debts or 70% of your total debts and your prior case was filed in good faith.

Chapter 13 Bankruptcy to Chapter 13 Bankruptcy—2 Years

If you previously filed a Chapter 13 case and received a discharge you must wait at least two years from the filing date of the first case before filing the second case. This time limitation rarely affects anyone since the minimum length of a Chapter 13 case is 3 years.

I Will Lose My Home if I File for Bankruptcy.

This is false. In Arizona, you can protect/exempt $250,000 of equity in your home. As, long as you don’t exceed the limit of the homestead exemption, you will keep your home in a bankruptcy. You should seek the advice of an experienced bankruptcy attorney to determine what effect, if any, a bankruptcy filing will have on your home.

I Don’t Have Enough Debt to File a Bankruptcy.

There is no minimum amount of debt to file for bankruptcy relief. Whether a bankruptcy makes sense for you will largely depend on your debt-to-income ratio.

Conclusion

There are countless myths surrounding bankruptcy. Don’t let these myths deter you from getting control of your finances and a fresh start. If you are in the Buckeye, Goodyear, Wickenburg, Avondale, Glendale, Surprise, Peoria, or Phoenix areas and have questions about filing a Chapter 7 or Chapter 13 Bankruptcy, give Treguboff Law, PLC a call for a free consultation.