There are a lot of myths surrounding bankruptcy which need to be dispelled. We hear these myths every day when we meet with potential clients. If you want to know the facts, you need to meet with an experienced bankruptcy attorney. Do not rely upon what you may read on the internet or what someone may tell you. If you are thinking about filing bankruptcy, it is critically important that you make an informed decision based upon hard facts and what is in your best interest. You cannot rely upon half-truths or myths. Here is a list of some of the more common myths that we hear from clients.
Bankruptcy relief is no longer available.
Not true. Congress did a major overhaul of the bankruptcy laws in 2005. However, the same forms of relief are still available through the Bankruptcy Code and most of our clients are able to file bankruptcy and wipe out most of their debts. The 2005 amendments did make the process more complex and hence more expensive but relief is still available. Congress did introduce a means test into the bankruptcy laws in 2005. Some higher income debtors (those above the state median income given their household size) may not qualify for relief under Chapter 7 of the Bankruptcy Code. They may have to file a Chapter 13 case. We find that less than 25% of our clients are above median income. A good percentage of those clients who are above median income can still file a Chapter 7 case when we complete the means test form. Completion of this form involves taking a series of deductions some of which are based upon real world expenses and some of which are based upon IRS allowances. Many of our higher income clients who do not qualify for Chapter 7 are still better off filing a Chapter 13 case and reorganizing their debts than pursuing non-bankruptcy options such as credit counseling. If you are a higher income debtor and are having problems paying your bills, you need to meet with an experienced bankruptcy attorney to review your options.
Medical bills and credit card debt cannot be discharged in bankruptcy.
Not true. In spite of what you may hear from debt collectors, you can still wipe out most types of unsecured debts in bankruptcy including medical bills, credit card debts and personal loans. We hear this myth a lot and it is simply not true.
Chapter 13 plans require me to repay my debts in full.
Not true. Chapter 13 bankruptcy is a form of individual reorganization in which a debtor files a plan with the court. The plan will make provisions regarding your unsecured debt. From our experience in the District of Maine, most plans do not pay back 100% of the amount of your unsecured debts. You are required to pay your projected disposable income (money left over after you pay your monthly bills) into the plan over a three-year time period (five years if you are above median income). Our goal in Chapter 13 cases is to propose a plan to the court that you can afford to pay given the requirements of the Bankruptcy Code. While we have filed plans paying 100% of the unsecured debt, it is the exception not the norm.
You will lose all of your property by filing bankruptcy.
Not true. Well over 95% of bankruptcy cases filed by individuals are "no asset" cases in which the debtor keeps everything he owns. That’s because exemptions provide for assets that the debtor can keep and some assets, like pensions, are beyond the reach of bankruptcy trustees and creditors. For example, in Maine you can have a car worth $5,000, equity in a home of $47,500 ($95,000 if you are over 60 or disabled), jewelry worth $750, and household furniture and clothing worth $200 per item. We will carefully review what you own for property to let you know if you will lose any property by filing for bankruptcy. We will engage in bankruptcy planning with you to maximize the exemptions that are available to you.
It is wrong to file for bankruptcy.
Not true. Many clients wrongly believe that they are bad people for filing for bankruptcy. This could not be furthest from the truth. Most bankruptcy filings are traceable to factors largely out of anyone’s control such as job losses, health problems, disability or divorce. How can you be blamed if a factory closes and your employer outsources those jobs to China? How can you be blamed if you become disabled and can no longer work? How can you be blamed if your spouse leaves you and files for divorce? Bankruptcy is there to provide people that need it a fresh start. It is the rare client who simply lived beyond his or her means and intentionally ran up the credit cards.
We have some clients who have deep moral or religious concerns regarding filing for bankruptcy. It is helpful to understand that modern bankruptcy laws have their roots in the bible. The "seven year rule" respecting the discharge of debts stems from the "Lord’s Release" in the bible. In Deuteronomy, it was mandated that debts be forgiven every seven years, regardless of a person’s circumstances. Deuteronomy 15: 1-3 ("At the end of every seven years you shall grant a release. And this is the manner of the release: every creditor shall release what he has lent to his neighbor or his brother, because the Lord’s release has been proclaimed".).
The New Testament reinforces the principles of debt forgiveness. The Lord’s Prayer as taught by Matthew provides that we seek to "Forgive our debts, as we forgive our debtors." Mathew, 6:12. The importance of debt forgiveness is reinforced in Mathew 18: 21-35. Jesus promoted debt forgiveness when he punished the "money changers" (lenders) by removing them from God’s temple. John 2:14-21. Jesus also said that for those who lend, and expect nothing in return, their "reward shall be great." Luke, 6:34-35.
Finally, the bible is replete with provisions showing compassion for debtors and admonishing heavy handed tactics from creditors. Deuteronomy, 15:7-10 (if a man is poor, do not be hardhearted or tightfisted toward him); Psalm 15:5 (a righteous man lends money without "usury" – the charging of interest on a debt); Deuteronomy 23:19 ("Thou shall not lend upon usury to thy brother."); Nehemiah 5:3-13 (pursuing relief from enforcement of mortgages on the homes and possessions of the Jews); Exodus, 22:25, Ezekiel, 18:13, 22:12, Leviticus, 25:35-36, Psalm: 15:5 (condemning the practice of usury).
In some form or another, all major religions, including Christianity, Judaism, Hinduism, and Islam prohibit usury by lenders while promoting compassion for debtors. Similarly, all religions value family preservation far more than repayment of debts.
You can never get credit again.
Not true. Bankruptcy will stay on your credit report for up to 10 years. This does not mean that you will not be able to get credit for this period. Many debtors who come to see us already have bad credit and a low credit score. In those cases, bankruptcy can actually help because you are getting a fresh start by eliminate debts that you cannot afford to repay. Many clients find that within a year or two their credit scores begin to recover. You can start rebuilding your credit once you receive your bankruptcy discharge by making timely payments on debts that you may have reaffirmed such as your car payment or home mortgage. You can try to develop savings. You can keep your debt-to-income ratio low. When trying to rebuild your credit after bankruptcy, be careful of predatory lenders and high interest loans. The most important thing is to be patient and your credit score will recover in time.
If I file for bankrupt once, I can never file again.
Not true. There are, however, restrictions on how often you can file for bankruptcy. For example, you cannot obtain a discharge of your debts in a Chapter 7 case when you have obtained a prior discharge in a case filed within 8 years. This means that there has to be eight years between Chapter 7 filings. You can file a Chapter 13 case six years after filing a prior Chapter 7 case and there has to be four years between Chapter 13 filings.
If I file for bankruptcy, I don’t have to list all of my debts.
Not true. If you file for bankruptcy, you have to list all of your creditors. You cannot pick and choose who to list. Some clients will tell us that they do not want to list a local bank or they want to keep one or more credit cards. This is not possible. All creditors must be listed. In certain circumstances, you can be denied a bankruptcy discharge by not listing all of your creditors. Furthermore, you may not be able to discharge an unlisted debt. It is imperative that you provide us with a detailed and complete list of all of your creditors.
Creditors can still harass you after you file for bankruptcy.
Not true. A bankruptcy stay goes into effect the second that you file for bankruptcy which stops all collection actions. Your creditors cannot call you, they cannot send you bills, they cannot proceed with lawsuits. Realistically, it does take some time for bankruptcy notices to be sent out by the court and processed by your creditors. For our experience, it can take a billing cycle or two for bills to stop. If anyone calls you after you file, tell about the bankruptcy, give them your case number and our name and phone number. If you still receive calls or collection letters after this, let us know about and we will make sure that it stops. It is against the bankruptcy laws for creditors to contact you post-filing. If collection efforts do not stop, we can file an adversary action in the bankruptcy court and obtain money damages against the creditor. Fortunately, most creditors play by the rule. Those that do not can be made to pay damages to you. Never be talked into repaying discharged bankruptcy debt. Contact us and we will let you know your rights and what can be done
You can’t get rid of back taxes in bankruptcy.
Not true. In certain circumstances, you can discharge old income tax liability in bankruptcy. There are several requirements that must be met. If you have old income tax liability, schedule an appointment with us and we will let you know if bankruptcy can help you.
Both you and your spouse need to file bankruptcy together.
Not true. Your spouse is not responsible for your debts. You can file together or separately, that is your choice. In many cases it makes sense for husband and wife to file together, but in some instances the spouse might not want to file or the spouse may not have enough debt to file. This is absolutely fine and definitely allowed by the court. You should be aware, however, that under the means test the income of a non-filing spouse is used to determine if a debtor qualifies for a Chapter 7 bankruptcy. In addition, in Chapter 13 or 12, the income and expenses of the non-filing spouse are used in formulating a plan payment.
Contact Attorney Perry O’Brian
We provide a free, initial consultation to all clients. To arrange an appointment with an experienced Maine Bankruptcy lawyer, contact us by e-mail or call us at 207-942-4697 (toll free at 877-900-9857). Installment payment plans are available, if necessary.