What are Some of the Myths and Falsehoods
About Filing Bankruptcy?
By Mark E. Henze
"Folklore" – Unwritten tradition or beliefs that often are unfounded and based upon myth, misconception or "wives tales"
1. Recent changes have made bankruptcy difficult, if not impossible to file.
While most attorneys realize that changes to the Bankruptcy Code made the procedures more convoluted, there will be as many bankruptcies filed this year as in a typical year prior to the changes. Additionally, to be fair, Congress's main intent was simply to make it more difficult to commit bankruptcy fraud. But what a cynical and creditor funded Congress has now begun to realize … there simply wasn't all that much fraud going on before the new changes anyhow. Bankruptcy is simply a fact of life and an inevitable part of a capitalist or financial market system. It cannot, and will not, go away.
2. Only destitute or impoverished people need to file bankruptcy.
Actually, those who are destitute do fine without filing bankruptcy. They have no property to lose and creditors soon give up on them. There is an old adage that "you cannot get blood from a turnip." It is actually people who have something to lose and are attempting to avoid joining the ranks of the destitute and homeless who benefit most from bankruptcy. There are some people who should be counseled not to file. They have nothing to gain. But if you believe that your situation is not permanent or hopeless, bankruptcy can likely be of help. In fact, most bankruptcy filers are intelligent, productive and stable people who have simply met up with inevitable and temporary hardships of life.
3. Everyone will know and I will be labeled a "deadbeat."
Financial problems are a fact of life. Loss of jobs, medical problems, a poor economy, a simple overestimation of income, and succumbing to the marketing pressures of a consumer driven financial system have always taken their toll. You'd be amazed to find out how many famous (and supposedly wealthy) people have filed bankruptcy. You'd also be surprised to know how many of your friends and neighbors have filed and you just don't know about it. Unless you are a newsworthy personality, it is unlikely that there will be any publicity concerning your filing. In Denver, there are no newspapers who regularly publish lists of people who have filed. Nor is there is any scarlet letter or symbol that you are forced to wear on your clothes. While the information is freely available as a public record, other than creditors, it is likely that no one else cares. In some cases, maybe you do need to (and can) learn from the experience. But in most cases, its simply a way of surviving the inevitable (and sometimes random) effects of our financial lives.
4. I will lose everything I own.
Most people who file bankruptcy lose nothing. In order to provide you with the "fresh start" that bankruptcy promises, there are certain types and amounts of property that cannot be taken away from you. Each state provides a list of "exempt property" that you are allowed to keep. This includes your household goods and furnishings, clothing, tools used at work, your retirement plan, and more. You are also able to keep up to a certain value in a vehicle (for each person if you file jointly) and a home. If you have an up-to-date mortgage or loan on your house or car, depending upon the amount of equity you have, you can continue to make those payments and keep the house or car. Even if you are behind in your payments, a Chapter 13bankruptcy may allow you to catch up on your back payments and still keep the house or car. This is a complicated area that your attorney can investigate and discuss with you further.
5. I should max out my credit before I file so as to take the most advantage of my filing.
Whoa! This is the type of attitude that gets many people into financial problems in the first place. This is also the reason why Congress was erroneously convinced that bankruptcy fraud was rampant. The right to file a bankruptcy and to discharge debts is a privilege that is granted to those who have honestly succumbed to the ravages of a market driven financial system. There are rules imposing presumptions of fraud when one engages in unusual credit card use or transfers property in the months prior to filing a bankruptcy case. This is an area where people without legal representation often get into trouble. There is substantial and legal planning that can be done, but it needs to be done in advance and in close consultation with an attorney.
6. If I file, I will never get credit again.
Interestingly, filing a bankruptcy will often help you to reset your credit record and begin new efforts to rebuild your credit scores. Think about it logically. If you were a creditor, would you rather deal with someone who is currently in bad financial circumstances … or with someone who has filed a bankruptcy, has learned some good financial lessons, and is unlikely to ever file again? The fact is that if you are behind on payments and your credit card is revoked or inactivated, your credit score will remain abysmal during the entire time while you slowly pay down the debt. Then, it will remain on your record for an additional 7 years after you make your last payment. While it is true that you will initially pay a higher interest rate for new credit and car loans (as you would even if you were paying back the delinquent debts), after filing a bankruptcy, your new credit accounts and payment record serves to reestablish your credit score.
7. I can select the debts I want to bankrupt.
The law requires that you list every debt that you owe and all of the property that you own. Even if you pay off the entire credit card balance before you file your case, the credit card company does not have to agree to let you continue to use the account. In fact, it does no good to fail to notify all of your creditors. Most creditors belong to a reporting service that tells them that you have filed … whether you have told the court about them or not. Yet, once the creditor is notified, there may be additional options that are available. For example, regardless of your filing, if you are not in default of your obligations, you may continue to make payments on a secured loan (such as a house or vehicle) and continue to keep the collateral. In addition, some unsecured creditors (such as credit cards) may offer to allow you to keep your credit privileges if you continue to make your payments, but this requires court approval and is highly frowned upon. After your case is completed and closed, you are free to repay any creditor that you wish (such as … your parents…). But typically there is little sense to doing this.
8. I must attempt to pay my creditors through a credit counseling company before I can file for bankruptcy.
This is a myth that the media has mistakenly passed on. In fact, you will be required to contact a credit counseling company for a "counseling" session prior to filing and obtain proof that you did so (a certificate). However, for most people contemplating bankruptcy (while the counseling is helpful), a decision to use the counseling company's debt payment service is too late, unwarranted or counterproductive. The service will be glad to simply issue your certificate and give you their blessing. Likewise, after the case is commenced, you will be required to participate in a short debtor education class. Both the counseling and the class are normally available in person, by telephone, or over the internet. You should plan on paying fees of about $50.00 for each.
9. It is expensive and financially irresponsible to use an attorney to file for bankruptcy.
In nearly 25 years of bankruptcy practice, the most heartbreaking stories I could tell deal with clients who either represented themselves or used a document preparation service. Sadly, bankruptcy is a technical and sometimes overly complicated area of the law. The recent changes passed by Congress only made it more so. All you need to go is to go to the U.S. Bankruptcy Court Website and read all of the "Court Rules" and procedures and you will recognize this. If you file for yourself, you will not know what to do when a creditor or a trustee takes advantage of your inexperience or when your case is dismissed for failure to follow the proper procedures. And the harm you cause may be irreversible. In most cases, the money that you spend on hiring an attorney will come from funds that creditors would otherwise be entitled to. In fact, if you file a Chapter 13 case, most of your attorney's fees come out of a pool of money that (if not paid to your attorney to help you with the process) would otherwise simply be paid to the creditors. Finally, if you do represent yourself, become overwhelmed and later decide to seek the help of counsel, many of the best attorneys will not take your case. They have learned from experience that by the time an individual seeks the help of counsel, the case is normally a mess and not worth getting involved with. Due to the numerous options and choices that are available in the law, an experienced bankruptcy attorney will likely admit to you that it is "Timing, Timing, Timing" … and "Options, Options, Options" that make the difference in a properly prepared and a poorly prepared case.
10. Options, Options, Options and Timing, Timing, Timing.
This is no folklore. In truth, it is important for you to know all of your options and make an informed decision between them. Then, timing is important to decide when the most advantageous moment to file your case is. If you file without the help of experienced bankruptcy counsel, you may be like a person investing in banks during the Great Depression (or this past year).
For a free initial consultation, call Henze & Associates, P.C. at