To many, bankruptcy is a four letter word, an ethical nether region where you mustn’t have your passport stamped upon entry. However, there are numerous misconceptions about the bankruptcy process, that when stripped away, make a difficult decision slightly easier. After all, knowing is half the battle.
In this post, we’ll try to set the record straight about some of the most common bankruptcy misnomers.
Myth: Filing Bankruptcy is Just Filling Out Some Forms
Nothing could be further from the truth. Bankruptcy court is serious business and every consumer should know this before they embark on the process. For good reason, most bankruptcy blogs like to focus on the benefits of filing bankruptcy, on the many ways in which the bankruptcy code can help those facing severe financial distress. To be sure, bankruptcy is often just what the doctor ordered for those struggling with unmanageable credit card debt or other financial ills. But buyer beware: the road to debt relief can be fraught with peril. Even a basic chapter 7 bankruptcy has the potential for litigation and the forms you submit to the court have serious legal implications. They are filed in federal court and scrutinized by trustees who are paid when they liquidate your assets. Sure, you may claim most of your assets as exempt but trustees have the power to object. This is not intended to scare you away from bankruptcy, but you should approach with eyes wide open.
Myth: You Will Lose All Your Property When You File Bankruptcy
Again, not true. Only non-exempt property is subject to sale in chapter 7 bankruptcy, the rest you keep. When you file bankruptcy, your property becomes part of a bankruptcy estate, which the trustee oversees for the duration of the case. This does not mean that he or she automatically liquidates all of the assets that fall under their jurisdiction. To understand the distinction between exempt and non-exempt assets see this post: What are Bankruptcy Exemptions? or this post: What Property Will I Have to Turn Over in a Bankruptcy? But for our purposes here, it is important to understand: many thousands of bankruptcy cases are filed each year where the debtor does not lose a single piece of property (including homes and cars).
Myth: I Will Never be Able to Access Credit Again
No reputable bankruptcy lawyer will tell you that bankruptcy is good for your credit score because it’s not. The filing of a chapter 7 case will stay on your credit report for 10 years and future lenders won’t love seeing it. You may pay higher interest rates for awhile as a result. But make no mistake, you will be able to access credit and rebuild your FICO score within one year of filing. Many debtors are surprised at the number of credit card offers they receive post-bankruptcy.
The ability to borrow money is based in large part on debt to income ratio. The more debt you have relative to total income, the less attractive you are to a prospective lender who questions whether you’ll be able to service additional debt. At least with regard to unsecured debt, such as credit cards, bankruptcy puts your outstanding balances at zero, which is a signal to lenders that you’re a candidate for new debt. However, just because you can borrow money after bankruptcy doesn’t necessarily mean that you should. Bankruptcy is designed to provide a fresh financial start, it is important not to burden yourself too quickly with high interest debt that can once again spiral out of control.
The Bottom Line
What is the bottom line? Bankruptcy is a process that can afford great relief but is to be taken very seriously. It’s more than just filling out some forms, litigation is around every turn. You likely won’t lose all of your property and will be able to rebuild your credit with responsible fiscal behavior after filing. Speak with a good bankruptcy attorney before taking any action and good luck!