- Personal Finance
As bankruptcy becomes an inevitable choice for many U.S. citizens, bankruptcy myths continue to swirl. Unfortunately, some of these myths are potentially dangerous for consumers who have no clue -- and more than half of Americans accept them as fact! With that in mind, here’s a list of the eight most common bankruptcy myths, debunked:
I Can File for Bankruptcy as Many Times as I Want
Not anymore. Since bankruptcy rules underwent a major overhaul in 2005, firm restrictions were put in place to prevent debtors from filing for bankruptcy multiple times in a short period of time. Now, debtors who filed for bankruptcy under Chapter 7 must wait a minimum of eight years before they may initiate a new bankruptcy proceeding under either chapter. For debtors who previously filed under Chapter 13, they must wait at least two years before they may initiate another Chapter 13 bankruptcy matter and a total of four years before filing under Chapter 7.
I Don’t Have to Pay Anything Back
While debtors may have gotten away with this in the past, the new bankruptcy rules require you to pay all of your debts as best you can -- regardless of the chapter under which you choose to file. For Chapter 7 bankruptcy filings, your assets are turned over to your trustee, who liquidates your property and auctions it off to raise some extra capital. You don’t see a penny of this money; instead, it’s distributed to your outstanding creditors -- the ones who own the debt that was discharged -- to help them recoup some of their losses.
For Chapter 13 bankruptcy filings, you develop a repayment plan, of which your creditors and the court must approve. You must demonstrate that you have a reliable source of income, and that you will be able to pay back your creditors under the repayment plan within no more than five years. While you may be able to negotiate a new amount with some of your creditors, make no mistake: one way or another, you will pay.
No One Can Make Me File for Bankruptcy
Contrary to popular belief, you are not the only person who can file for bankruptcy on your own behalf. While it’s technically true that no one can make you file for bankruptcy, your creditors can file for bankruptcy for you if they feel it’s in their best interest. Corporate entities are forced into bankruptcy on a regular basis by their creditors, and the same rule applies to individual filings, too. Although the chances of your creditors filing a bankruptcy for you are rare, it’s certainly not impossible.
The Judge Has to Accept My Bankruptcy Petition
When you file for bankruptcy, the very first thing the judge will do is review your petition with a fine-tooth comb. One lie, one omission, one major mistake, and the judge can choose to dismiss the entire proceeding. The judge is under no obligation to accept your bankruptcy petition just because you file; in fact, if he suspects you committed fraud or that you lied to the court, he can throw out your case and bar you from filing again for the next few years. This is why it is so crucial that you do everything in your power to present the most complete, honest petition you can when you file for bankruptcy -- don’t lie about anything, and don’t hold anything back.
Bankruptcy Improves My Credit History
Bankruptcy is arguably the absolute worst thing you can do for your credit history, and for a good reason. When you file for bankruptcy, you are admitting in open court that you took on far too many liabilities than you could afford. The minute you finalize your bankruptcy matter, your credit report will show a discharge next to each and every one of your discharged debts -- the lowest-possible rating for a trade on your history. Moreover, for up to ten years after you file, every creditor who pulls your credit history will see those discharges and know you’ve filed for bankruptcy. While it’s certainly possible to secure credit after a bankruptcy, having a bankruptcy on your credit history does nothing to improve your score and everything to worsen it.
I Can Keep My House and My Car After Bankruptcy
A popular bankruptcy myth is that consumers who file for bankruptcy get to keep their house and their car no matter what. This is only partially true -- you may be able to keep your house and your primary vehicle, but only if you continue making payments on your mortgage and your auto loan. If you choose to discharge your mortgage loan and your auto loan during your bankruptcy proceedings, your house and your car are liquidated to help pay back the debt that you owe, just like everything else.
I Don’t Have to Pay Child Support After Bankruptcy
On the contrary, your child support obligations are at the very forefront of your financial liabilities, bankruptcy or not. Child support payments cannot be suspended, discharged or terminated for any reason, bankruptcy included. The only way you can reduce your child support obligations is by requesting a review of your current financial status by the family court that initially entered the order, and only if you qualify for such a reduction; the judge will not consider your pending or recent bankruptcy when making a determination. You will have to continue paying your child support throughout your bankruptcy proceedings, and you do not earn any leniency for going bankrupt.
All of My Debts Will Be Discharged
Ever hear the adage, “the only thing certain in life is death and taxes?” Well, bankruptcy is no exception. Tax obligations -- including past, present and future -- stick with you until the day you die. So no matter how large your outstanding tax bill is, bankruptcy cannot make it go away.
Besides federal and state taxes, other debts that you cannot discharge include:
- child support arrears
- back-owed alimony
- college/educational loans
- tax liens
- civil and criminal sanctions
- civil judgments
- criminal fines/punishments
- debts you secured through fraud, embezzlement or larceny
The U.S. Bankruptcy Code defines the entire list of all 21 debts that cannot be discharged during bankruptcy. You can learn more about debts that cannot be discharged in bankruptcy here.
Note: In rare, extreme cases totaling less than 1% of all consumer bankruptcy filings, some of the above-mentioned debts may be dischargeable. However, child support and alimony obligations are never dischargeable no matter what your personal circumstances may be.