Tuesday, September 12, 2006

Debunking Bankrate's 12 Myths of Bankruptcy

Bankrate.com has posted 12 Myths About Bankruptcy. As we have a page on our site called 6 Myths of Bankruptcy I thought it would be an interesting read. After all, maybe there are some additions we could make to our page!

So imagine my surprise(not) when I started reading myths about the myths. Shall we?

1. Everyone will know I've filed for bankruptcy.
Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While it's true that bankruptcy is a public legal proceeding, the number of people filing is so massive that very few publications have the space, the manpower or the inclination to run all of them.

This is our #4. In reality, most counties do publish the names of people or businesses that file bankruptcy. In our area, they are published in the one of the daily papers and in the monthly business magazine. It has been our experience that with few exceptions the names are published regularly. In Chicago, there is a separate legal publication that publishes all legal filings, including bankruptcy. The point trying to be made is that few people actually READ such notices. The three groups most likely to read the listings: creditors, advertisers (people selling credit repair scams) and the terminal (those people without a life).

2. All debts are wiped out in Chapter 7 bankruptcy.
You wish. Certain types of debts cannot be discharged (erased). They include child support, alimony, government-issued or government-guaranteed student loans, and debts incurred as the result of fraud. It's also very unlikely that a judge will discharge legal settlements you've been assessed, such as money you've been ordered to pay to someone who sued you.

They start off great, but end terrible. Judgments (what they claim to be legal settlements) are often dischargeable. If a credit card company gets a judgment against you, it is discharged in a chapter 7. Some judgments where you are assessed criminal damages to pay someone you have harmed do stay after bankruptcy. Only a good bankruptcy attorney can determine which judgments are dischargeable. Where fraud is concerned, talk to an attorney. Of course the biggest omission in their list is SECURED debts. Your personal obligation gets discharged, but plan on continuing to pay the mortgage or car loan if you want to keep them because the liens still exist against the property.

3. I'll lose everything I have.
This is the misconception that keeps people who really should file for bankruptcy from doing it, says Chris Viale, chief operating officer of Massachusetts-based Cambridge Credit Counseling Corp.

"They think the government will sell everything they have and they'll have to start over in a cardboard box," Viale says.

While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

This is our #6. There are some states that do not have exemptions. In those states, FEDERAL exemptions apply. Ok, maybe I am just being picky here. But, what can be exempt was seriously curtailed with the new bankruptcy law. Among other things, the federal exemptions now limit you to ONE TV, one radio, one computer and one DVD/VCR (and clothing and household goods). Paintings bought at a store, golf clubs, guns and bikes (adults) are also more exposed under the new law. Although there are ways to deal with this change, a good bankruptcy attorney is necessary!

4. I'll never get credit again.
Quite the contrary. It won't be long before you're getting credit card offers again. They'll just be from subprime lenders that will charge very high interest rates. "There are innumerable companies that will provide credit to you," says California bankruptcy attorney and trustee Howard Ehrenberg. "I don't advise any of my clients to run out and run up the bills again, but if someone does need an automobile, they can go and will be able to get credit. You don't have to go underground or something to get money."

However, if you're planning to buy a house or a car, you might want to do that before you file. Those loans will be tough to get and the higher interest rate on such a large purchase would make a significant impact on your payments. Also, if you have a credit card with a zero balance on the day you file for bankruptcy, you don't have to list it as a creditor since you don't owe any money on it. That means, you might be able to keep that card even after the bankruptcy.

Our #5. First they are correct about getting credit in the future. Heck, we even have Chapter 13 clients getting refinanced while IN bankruptcy. But it does have an impact on your credit rating, history and the rates you will be offered. Be very careful with credit offers, scams are rampant. Oh, and their suggestion to obtain debt before filing, such a suggestion is ILLEGAL if made by anyone offering bankruptcy advice. However, this is one of the perversions of the new law. Example: Two single men, one earning $45k a year, the other earning $90k a year. Both wanting to file a chapter 7. Assuming the median income in their area is $40k a year, at initial glance, both have to file chapter 13 instead. Let's now compare debts. Our $45k earner rents, has a beater car and $80k in credit card debt. Our $90k earner owns a home, a new Hummer, a Harley, a Snowmobile, a $2k computer and all new furniture - all purchased with secured debt, and $25k in credit cards. After all calculations are done, our $45k earner has to pay $450 a month into a chapter 13 plan, but our $90k earner qualifies for a chapter 7. Sounds fair? It is the new law.

5. If you're married, both spouses have to file for bankruptcy.
Not necessarily. "It's not uncommon for one spouse to have a significant amount of debt in their name only," Hargrave says. However, if spouses have debts they want to discharge that they're both liable for, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn't file.

We ignore this one because we are a community property state. Debts are usually community property (there are exceptions - talk to a good bankruptcy attorney!) and therefore filing as a married couple makes sense. There are several community property states, check yours. But even here, we get one spouse filings. Give them this one.

6. It's really hard to file for bankruptcy.
It's really not. You don't even technically need an attorney. However, it's not recommended to go through the procedure without one.

Technically you don't need a dentist to pull a tooth. Technically you don't need an attorney to buy a home. Technically you don't need a doctor for a 104 fever. It is not hard to file bankruptcy at all! It is however very hard to get a discharge that covers all the debts that can be discharged without a good bankruptcy attorney. I'll give them this one, technically.

7. Only deadbeats file for bankruptcy.
Most people file for bankruptcy after a life-changing experience, such as a divorce, the loss of a job or a serious illness. They've struggled to pay their bills for months and just keep falling further behind.

Our experience is that over 90% of people that file bankruptcy have had at least one of the 'life-changing experiences'. We have had gamblers, and an occasional "I'm going to beat the system' types (which we send packing BTW). But my nit-pick here is the 'struggled for months'. In almost every case, the time frame is years. On average 2.5 years. No credit here, they are adding a myth.

8. I don't want to include certain creditors in my filing because it's important to me to pay them back someday and if the debt is discharged, I can't ever repay them.
Bless you for even thinking about such a thing. You're no longer obligated to repay them, but you always have that opportunity. If your conscience won't let you sleep nights because you didn't pay your debts, there's nothing in the bankruptcy code that prevents you from doing that once you're back on your feet. But bankruptcy is an all-or-nothing deal, so you have to include all your creditors in the petition.

Bless you? Credit extension was a BUSINESS decision, appealing to your religious guilt is a way creditors coerce people to keep paying even at the expense of family or health. For decades businesses have used the bankruptcy card to justify higher interest rates. Anyone see interest rates GO DOWN this year? Nope. How many businesses get the government to bail them out of a bad decision? After 8 years of trying the credit industry got just that plum. Exactly how many $600 million dollar a year in profit businesses do you know care one bit about YOU? Bless you...HAH! No credit on this one just for pissing me off....

9. Filing for bankruptcy will improve my credit rating because all those debts will be gone.
That sounds like an ad for a bankruptcy lawyer trolling for clients. Filing for bankruptcy is the worst 'negative' you can have on your credit report. Unlike other negatives, which stay on your report for seven years, bankruptcy can be there for 10 years.

Oh, those nasty bankruptcy lawyers.....trolling for clients....while credit card companies send out 5 BILLION OFFERS this year.... Yep, bankruptcy is a bad thing on your credit report...so is a repossession, a foreclosure, judgments and continued lates on payments....so when a bankruptcy is filed...the judgments go away, the lates stop and you get back on your feet financially. While there will be some hemming and hawing from the credit REPORTING side of things, all things being equal, if you take two people in exactly the same terrible financial shape, have one file bankruptcy and let the other continue struggling, guess who's credit score will be higher next year? You got it...the person that filed bankruptcy. And remember their #4? Never get credit again? Who do you think the credit issuers will give lend to next year? The person that filed bankruptcy, or the one still struggling?

10. You can't get rid of back taxes through bankruptcy.
Generally speaking, this is true. However, there is such a thing as tax bankruptcy, says tax educator Eva Rosenberg, known on the Web as Tax Mama. To get a shot at it, you have to file all your returns and the taxes owed need to be at least three years old.

It is not easily done, and as stated, there are conditions, but taxes can be discharged. Credit them this one.

11. You can only file for bankruptcy once.
You can file for bankruptcy more than once, but the bankruptcy law that went into effect in October 2005 lengthened the required wait between filings. You can only file for Chapter 7 bankruptcy once every eight years. You have to wait two years to repeat a Chapter 13 filing and four years between a Chapter 7 and a Chapter 13 case.

Of course, that doesn't make it a good idea.

"Multiple bankruptcies are really bad," Rosenberg says. "Many people get into the habit of once they've done it, it becomes a way of life. This is not good for your karma." Or your credit rating.

Actually, the time frames with regard to Chapter 13 are more ...pliable... than that, but generally speaking they are right, you can file more than once. Prior to the law, we often filed twice for a particular type of client: homeowners. We would file a chapter 7 to get rid of unsecured debt, then a chapter 13 to deal with secured debt. It is still possible to the same under the new law, with some qualifiers and conditions. But I will call your attention to one repeat filer many will be familiar with: Donald Trump. There are reasons for bankruptcy, and damn it, leave religion out of it.....karma....shheesssh.

12. I can max out all my credit cards, file for bankruptcy and never pay for the things I bought.
That's called fraud and bankruptcy judges can get really cranky about it. The trustee in your case will review all your purchases right before your filing. The trustee knows what to look for.

Ah, now the credit industry wants to let bankruptcy judges and trustees watch for fraud. See, before the new law passed, it's supporters claimed that the judges and trustees practically NEVER caught such fraud despite it's obvious widespread nature. And for many people that do file bankruptcy, many of them, maybe a majority, maxed out their credit cards in the year before filing without any problem in bankruptcy.

So. There are myths about bankruptcy, mostly promoted by the credit industry to keep you from filing. If you have these danger signals, you should be talking to a knowledgeable bankruptcy attorney. Because the most important myth to debunk is the one you read about somewhere.

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