In the Halloween spirit, I will try to unspookify bankruptcy by casting out misunderstandings about this valuable financial tool. While everyone is probably familiar with rumors about the misuse of bankruptcy, there are even more cases where the proper use of the Bankruptcy Code with a bankruptcy attorney created real and lasting benefit to individuals. Therefore, in order to set the record straight, I dispell the following myths:
MYTH #1: You Lose All of Your Property In A Bankruptcy
As I wrote in my last blog, the Bankruptcy Code provides exemptions for certain property so filers can obtain a “fresh start.” These exemptions allow you to keep life’s necessities and avoid being wiped-out. Even if you cannot exempt everything, a bankruptcy attorney can counsel you to protect any additional assets from being sold for your creditors. Although you have the option to sell or surrender property (often with great advantages over selling them outside a bankruptcy), it is your choice provided you plan properly and take the required precautions.
MYTH #2: You Will Be Destroyed Financially Forever
While bankruptcy remains on your credit history for 10 years, it also discharges unpaid debt. This discharge may actually improve your credit score. Further, in most cases, the “fresh start” provided by the bankruptcy allows you to rehabilitate your credit by turning the page from prior problem credit to future good credit. Filers are required to complete two courses aimed at giving them the tools they need to improve their credit usage. As you begin to demonstrate that you can properly utilize credit, companies are much more likely to extend loans, insurance and rental contracts as opposed to someone who does nothing to improve their situation. In fact, the credit report service that we use projects your credit score in 12 months under the assumption that your current debts are discharged and you correct any mistakes on a new blank page.
MYTH #3: Filing Bankruptcy Is Difficult
Filing bankruptcy is difficult, and outright dangerous, if not done properly. An improper filing can lock you into bad situations with no escape. However, if you consult with a bankruptcy attorney, he or she will guide you around things that go “bump” in the Bankruptcy Code. Just as many people seek a professional to file their own tax returns, bankruptcy should be left to those who are trained in the field and can use their experience to your advantage. While there are many ghouls who may give you a good price to help you file, you often get more than you expected by way of unresolvable problems. While these myths may not be true through the guidance of a bankruptcy attorney, no predictions can be accurately made in the hands of someone who does not have your best interests at hand.
MYTH #4: One Last Spending Spree With The Credit Cards Before Bankruptcy Is A Good Idea
Creditors are way ahead of you on this one. The primary purpose of the Bankruptcy Code is to give the honest but unfortunate debtor a fresh start. Nothing screams dishonest more than running up account balances when your intent is to thereafter discharge the debt. To that end, the Bankruptcy Code excepts from the discharged debts those that are incurred shortly before filing. In fact, you cannot even retain your bankruptcy attorney with a credit card since the charge would otherwise be discharged. Reckless or intentional spending shortly before bankruptcy can at best significantly delay the filing of your petition and at worse disqualify you from a discharge and possibly lead to criminal charges.
MYTH #5: You Can Pick And Choose Which Property And Debts With Which You Claim Bankruptcy
The filing of a bankruptcy creates an estate (just like when someone dies or when a couple divorces) that includes just about all the property in which you have any type of interest. If you fail to disclose certain property, you cannot exempt it and therefore it remains in the estate until the Trustee finds out and takes it. At times, it can lead to criminal charges in the form of bankruptcy fraud. The same goes for debts. In exchange for the relief you seek from your creditors, the Bankruptcy Court expects full disclosure of your financial circumstances. Be prepared to disclose everything relevant to your bankruptcy filing when you consult with your attorney.
That’s enough bobbing for myths for now. We will cover 5 more myths next time. If you hesitate to consider bankruptcy because of a potential misconception, contact us. We give second chances on Second Street.