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Bankruptcy Myths

 

 

I Can’t File Bankruptcy Anymore.

 

            In 2005 Congress amended the law governing bankruptcy.  The amendments did not abolish bankruptcy; rather it amended existing law by making bankruptcy more difficult and complex by requiring new documentation and requiring more accurate information.  However, after the amendments, just as before the amendments, people who cannot pay their debts may still file bankruptcy and get a fresh start by having some or all of their debts discharged.  This myth stems, in no small part, because some debt collectors appear to be telling people that bankruptcy is no longer available so that they can increase the pressure for people to pay their debts.

 

If I Make More Than Median Income I Can’t File Bankruptcy

 

            One of the changes made by Congress was the implementation of a “means test.”  Under the amended law those filing for bankruptcy must complete and file the means test.  The purpose of this test is to determine whether people can pay part of their debts and, if they can, they must.  After completing the means test your income will be compared to the median income for the area in which you live after deducting certain expenses.  Although the means test is complicated, it essentially determines whether a person should file a Chapter 13 (where you would pay back some or all of your debts) or a Chapter 7 (where all of your unsecured debts are discharged).  If you can afford to pay something to your creditors then you do; if you cannot afford to pay your creditors, then you don’t.

 

In Order to File Bankruptcy I Must Complete Difficult Credit Counseling

 

            While the new law requires you to complete a credit counseling course before you file and a course in financial management after you file, but before you are granted a discharge, these requirements require very little time and expense.  You simply pick one of several companies that provide credit counsel services and financial management courses, complete the course, then file a certificate of completion with the Court.  There is no need to worry about the providers of these courses as the providers have all been approved by the United States Trustee that can be used in bankruptcy proceedings.

 

If I File For Bankruptcy I Will Lose All of My Property

 

            Almost everyone will be able to keep their property after filing bankruptcy.  Under current law there are a variety of exemptions available in a variety of amounts.  So long as you do not have significant assets, these exemptions have the effect of allowing you to keep your property.

 

Bankruptcy Won’t Stop Creditor Harassment or Lawsuits

 

            This is simply not true!  Immediately upon filing bankruptcy the United States Bankruptcy Court issues what is known as an automatic stay.  The automatic stay acts as an injunction to prevent creditors and debt collectors from contacting you or in any way attempting to collect any debt which existed on or before the date the bankruptcy is filed.  This stay is an important part of bankruptcy because it allows people to go through bankruptcy without being harassed by bill collectors.  The law provides penalties against debt collectors and creditors who violate the automatic stay by continuing their collection efforts so most creditors stop all collection efforts after the filing of a bankruptcy.  While the amended law has changed some aspects of the existence and continuance of the automatic stay in cases where a person repeatedly files a bankruptcy, most people are not impacted by these changes.

 

If I File Bankruptcy My Credit Will be Ruined For Years

 

            This is another myth that is false.  While a bankruptcy filing does show up on your credit report, the fact is that for most people their credit scores actually improve within twelve months of filing.  You will still be able to obtain credit after your completion of your bankruptcy, although you may have to pay higher interest rates on the credit you obtain until you re-establish your credit.
The Four Chapters Of The
 Bankruptcy Code Available To Individuals
 
 
Chapter 7 Liquidation
 
(Filing Fee of $249.00, Administrative Fee of $39.00 and Trustee Surcharge of $15.00 for a total Filing Fee of $299.00)
 
            Chapter 7 is designed for people in financial difficulty and cannot pay their existing debts. People whose debts are primarily “consumer” debts are subject to a “means test” designed to determine whether the case should be filed as a Chapter 7. If your income is greater than the median income for your area and family size, your creditors have the right to file a motion requesting the Court dismiss your bankruptcy case. It is then up to the Court to decide whether your case should be dismissed.
 
            Under Chapter 7 you can claim certain of your property as exempt. The Trustee may have the right to take possession of and sell your property if it is not exempt and use the proceeds of the sale to pay your creditors.
 
            The purpose of filing a Chapter 7 is to obtain a discharge of your debts. Once discharged, your creditors can no longer collect debts owed before the filing of your bankruptcy. If, however, the Court finds that you have committed certain kinds of improper conduct described in the Bankruptcy Code, the Court may deny your discharge and, if it does, the purpose for which you filed will be defeated.
 
            Some debts, such as most taxes, student loans, domestic support and property settlement obligations, most fines, penalties, forfeitures, criminal restitution, debts not properly listed in your petition, debts for death or personal injury caused by operating a motor vehicle while intoxicated, are not discharged under the law. Further, if a creditor can prove that debt arose as a result of fraud, breach of fiduciary duty, theft, or from a willful and malicious injury, the Bankruptcy Court may determine that the debt is not discharged.
 
Chapter 13
 
(Filing Fee of $235.00, Administrative Fee of $39.00 for a total Filing Fee of $274.00)
 
            Chapter 13 is designed for people with regular income who would like to pay all or part of their debts in installments over a period of time. You are eligible to file Chapter 13 if your debts do not exceed certain dollar amounts set forth in the Bankruptcy Code.
 
            Under Chapter 13 you must file a plan to repay your creditors all or part of the money that you owe them with the Court. The plan must be funded using your future earnings and, because you are agreeing to commit your future earnings to pay your debts, you get to keep all most all of your property. Before the plan can take effect, however, the Court must approve it.
 
            After completing payments under your plan, your debts are generally discharged except for most taxes, student loans, domestic support and property settlement obligations, most fines, penalties, forfeitures, criminal restitution, debts not properly listed in your petition, debts for death or personal injury caused by operating a motor vehicle while intoxicated, are not discharged under the law. Further, if a creditor can prove that debt arose as a result of fraud, breach of fiduciary duty, theft, or from a willful and malicious injury, and most long-term secured obligations.
 
            Unlike Chapter 7, you may also be able to modify or eliminate secured obligations. For instance, if you own a home with a first and second mortgage, and the property is worth less than the first, you may be able to eliminate the second mortgage. Similarly, if you own a car that is worth less than what you owe, you may be able to reduce the amount you owe.
 
Chapter 11 Reorganization
 
($1,000.00 Filing Fee, $39.00 Administrative Fee for a total Filing Fee of $1,039.00)
 
            Chapter 11 is designed for the reorganization of a business, but is also available to consumers. Chapter 11 reorganizations are extremely complicated and any decision by an individual to file a Chapter 11 should be carefully reviewed with an attorney.
 
Chapter 12 Family Farmer or Fisherman
 
($200.00 Filing Fee, $39.00 Administrative Fee for a total Tiling Fee of $239.00)
 
            Chapter 12 is designed to permit family farmers and fishermen to repay their debts over time from future earnings and is similar to Chapter 13. The eligibility requirements are restrictive and limit its use to those whose income arises primarily from a family-owned farm or commercial fishing operation.