Ten Top Myths About Bankruptcy
1. BANKRUPTCY WILL RUIN MY CREDIT FOR TEN YEARS.
Not true. It is true that bankruptcy stays on your credit history for up to ten years at all three major credit reporting agencies, but your credit score is updated and recalculated at least four times a year by these same agencies, based on many factors. (Actually, most people who file bankruptcy already have lousy credit scores.) Credit scores give more weight to the most recent payment history; as reported lateness, collection activity, the date of your bankruptcy, etc. becomes older, how much it counts against you decreases. All negative marks against your score disappear completely after seven years, except for bankruptcy, which disappears completely in seven to ten years.
If you have many overdue reported bills and file bankruptcy, then make all your payments promptly after coming out of bankruptcy, your credit score begins a slow, steady, upwards climb. In fact, by filing bankruptcy, you can stop further negative reports which would depress your score even more, such as lawsuits, court judgments, garnishments, etc.. Depending on your circumstances, you can often prevent mortgage foreclosure and car repossession by filing bankruptcy, which may otherwise hurt your credit even worse than bankruptcy.
Many people are surprised to receive offers of new credit cards after coming out of bankruptcy. (Of course – the banks know you can’t file again for eight years!) The interest rates are often very high, but if you accept a couple of these and only use them for something you can pay off faithfully every month, such as gasoline or groceries, you will develop a much better credit history, your credit score will gradually climb, and eventually you can get cards with decent interest rates. It is not unheard of for people who made all their payments promptly after bankruptcy to have good credit scores as soon as two or three years after bankruptcy. Donald Trump, Henry Ford, and Walt Disney have all had pretty good credit— and they had all previously gone bankrupt! (Trump, three times!)
2. FILING FOR BANKRUPTCY WOULD MAKE ME A DEADBEAT.
Most people file for bankruptcy only as a last resort, after months or years of struggling with bills and bill collectors. Honest, hard-working people can find themselves in a hopeless situation when they lose their job, have unexpected medical expenses, are deserted by their spouse, or a hundred other legitimate reasons for seeking relief via bankruptcy.
One Harvard study concluded that about half of all bankrupting people interviewed got into financial trouble through illness and medical bills, and three-quarters of these had medical insurance at the time! Co-pays, deductibles, exclusions, loopholes, and other out-of-pocket costs were often enough to drive them over the edge, to say nothing of those who lost their insurance coverage when they lost their job.
But regardless of the reason for needing help, most people who end up in bankruptcy sincerely want to pay all their bills, but just can’t- and creditors who won’t work with them in a reasonable manner don’t help any.
3. EVERYONE WILL KNOW I HAVE FILED FOR BANKRUPTCY.
Your creditors will find out, but usually, if you don’t tell anyone, no one else is likely to find out. When famous people or big corporations bankrupt, the nosy media sometimes report it, but with some 68,000 Georgia residents filing bankruptcy every year, it’s usually just not very newsworthy. Bankruptcy court records are public, but typically no one outside of the debt industry goes rooting around in them. If you want to keep it as quiet as possible, just keep it to yourself.
4. I’LL LOSE EVERYTHING I HAVE IF I FILE BANKRUPTCY.
Wrong. Most people keep most or all of their personal property; and 401(k)’s, IRA savings, and SSI or Social Security payments, if applicable, are not touched.
In Chapter 13 bankruptcy, you can generally keep everything, in return for paying what you can afford on your debts for either three or five years after meeting your day-to-day living expenses. You can even keep your house and car, even if the payments are months overdue, as long as your Chapter 13 provides a way for you to catch them up in three to five years after cutting down on payments for less important debts.
In Chapter 7 bankruptcy, you do not have to make any payments, but are forgiven all of your debts except for a very few exceptions, the most common being child support and student loans. You can keep your house and car if your payments are current and you do not have too much equity in them. Unless you have a lot of expensive art, antiques, etc., you can usually keep all your personal effects and property, up to certain limits, through a system of exemptions. (95% of Chapter 7 clients do not have to give anything up.) If you have a lot of valuable personal property or real estate other than your residence, or you have too much equity in your residence, you can usually file Chapter 13 instead.
5. I WILL NEVER BE ABLE TO OWN ANYTHING AGAIN.
Wrong! You can own anything you can afford after bankruptcy. Some people can qualify for an FHA mortgage at good interest rates as soon as two years after bankruptcy, as long as they don’t get into trouble with their credit again. Among the famous people who have filed for bankruptcy and later gone on to own things are Donald Trump, Henry Ford, H.J. Heinz, Walt Disney, Ulysses S. Grant, Charles Goodyear, Milton S. Hershey, Harry S. Truman, Mark Twain, John J. Audubon, P. T. Barnum, Ted Nugent, Nelson Bunker Hunt, E. Howard Hunt, and Abraham Lincoln.
6. YOU CAN’T GET RID OF BACK TAXES IN BANKRUPTCY.
This is only partly true. You still must pay the latest three years’ federal and state income taxes, but income taxes older than three years can be wiped out. Also, business owners cannot escape overdue withholding or sales taxes, regardless of age.
7. YOU CAN ONLY FILE BANKRUPTCY ONCE.
No, you can file Chapter 7 every eight years, and a Chapter 13 right after a Chapter 7 or another Chapter 13. (Hopefully, once will be enough!)
8. BILL COLLECTORS MAY STILL HARASS ME AFTER I FILE FOR BANKRUPTCY.
Absolutely wrong! Creditors are not even allowed to contact you without permission as soon as your case is filed. Foreclosures, wage garnishments, and repossessions are stopped in their tracks. If you are being sued, and a court date has been set, the creditor’s lawyers must immediately stop all proceedings. No more collection efforts may occur on any account. If a creditor attempts to collect from you after you file, you have the right to sue him for cash damages! The Federal Bankruptcy Court Judges do not hesitate to punish creditors who ignore the Bankruptcy laws.
9. IF I FILE BANKRUPTCY, IT MAY CAUSE MORE TROUBLE AND STRESS IN MY FAMILY.
Every family is different, but just the opposite may be true. It may be that the major sources of stress and discord in your marriage are the unpaid bills! Constant collection calls such that you hate to answer the phone, continual dunning letters that make you hate to look at the mail, threats of foreclosure or repossession, lawsuits, and wage garnishment are all very stressful for most people. Even in families without major debt troubles, finances are always one of the top three causes of arguments.
Decent people want to pay all their bills, and this horrible treadmill of excessive debt is not only discouraging but very stressful, if not infuriating. Once you recognize the need to finally do something about the situation, filing bankruptcy can bring peace back into the home — the phone stops ringing, the threats and demands stop, foreclosure and/or repossession may be prevented, and you are given breathing room to get a fresh start.
Sometimes relationships will deteriorate further if you do not file for bankruptcy! We have seen bankruptcy (when needed) help relationships far more than hurt them in almost every case where we had feedback. Working together for a brighter financial future is better than dealing with relentless debt collectors and trying to decide what bills you can afford to pay, all while getting deeper in debt.
10. FILING BANKRUPTCY WOULD BE CONTRARY TO MY DUTY TO GOD.
Ordinarily, it is true that your Biblical duty is to pay your debts. However, most people considering bankruptcy are unable to pay all their debts, because of layoffs, medical bills, or a hundred other unforeseen situations. God does not expect you to do the impossible. True, ideally it may be that you should have prepared better or been more careful with debt, but what’s done is done and you may need to get off the debt treadmill now. That’s why He put a bankruptcy provision right in the Bible! In the Old Testament, God commanded to give debtors in ancient Israel relief. This was to be available every seven years (modern American law allows Chapter 7 bankruptcy every eight years):“At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the LORD’s release.” (Deuteronomy 15:1-2)
Also, in the New Testament, Jesus told of two cases of a creditor forgiving a person’s debt (Matthew 18:26-27, Luke 7:41-42), in the context of teaching about God’s forgiveness and our duty to forgive one another. Jesus also said, “For ye have the poor with you always” (Mark 14:7), showing it is a normal part of the human condition for some people to have financial problems. Let us not judge ourselves more harshly than God Himself. Sometimes bankruptcy is the best way out of a mess. That’s why God made provision for debt relief for His ancient people, and that’s why the bankruptcy courts exist today. Use them if you need to.