Bankruptcy Myths

You may have heard quite a bit about bankruptcy, either from your friends or on the news, but there are a lot of myths floating around about bankruptcy, particularly since the recent law change.

I don't owe enough money to file bankruptcy.

Obviously, discharging only a little more than the cost of bankruptcy makes no sense. The issue is how far the water is over your head. In some cases, for a given amount of debt I would not recommend a bankruptcy. However, if the same person had a wage attachment that would cause them to fall behind on their house payments and get foreclosed, that would warrant bankruptcy. I'd be happy to help you figure out your options.

If I am married, I cannot file without my spouse.

Not true. Either spouse can file without the other. However, filing for one spouse without the other can cause problems. If this is something you are considering, please talk to me first and I can advise you on the best way to proceed.

It is ok to run up debts right before bankruptcy.

Sorry, but no. Creditors can successfully object to your wiping out (discharging) their debts, or perhaps even to the entire bankruptcy. If you incur debts with the intent of not paying them, it is fraud. One of the concepts underlying bankruptcy is balancing the rights of creditors and debtors. If you are considering bankruptcy, please talk to me before making any big purchases, so that I can advise you on the best way to proceed.

I can't discharge ___________ in bankruptcy

Credit cards / Medical bills? Dischargeable!.

I cannot file bankruptcy without passing a test.

Bankruptcy that the debtor participates in is called "debtor education". If you have ever been to traffic school, you have a good idea of what debtor education is all about. Basically, it takes about two hours to do an interactive program to qualify for the debtor education before bankruptcy, and then another two hours after filing prior to the entry of a discharge. I have had more than 500 clients get through debtor education. Debtor education can be done in person in Bakersfield or online.

The trustee will sell my possessions.

In the vast majority of cases the trustee does not sell anything, meaning the debtor keeps all of their possessions.

The trustee will come to my house and go through my stuff.

In more than 25 years as an attorney and more than 20 years as a Chapter 7 trustee, I cannot think of a case where a trustee went to someone's house except for when they didn't have a telephone and knocking on the door was the only way to communicate with a client. Learn more about dealing with the trustee at a 341 meeting here.

Credit history associated with accounts included in bankruptcy.

On the contrary, all of the bankruptcy-related history continues to appear on your credit report and is considered by the scoring formulas for the entire 7 to 10 post-bankruptcy years, though the negative impact diminishes over time.

So, before taking the big leap into bankruptcy, consult a bankruptcy attorney and learn the facts about how credit scores treat bankruptcy. You just may be able to minimize the damage and get a jump on re-establishing your credit after filing. If you want to know where your credit score stands following your bankruptcy, you can use a service like Annual Credit Report, which offers you a free credit score once a Year.

I will never get credit again.

Credit exists after bankruptcy. It is more expensive and reestablishing credit takes time. While I certainly do not recommend bankruptcy as a credit improvement technique, if you could pay your bills now, your credit would improve. If, however, in two years you are still struggling and paying debts late, your credit would be worse than if you had filed bankruptcy today.

All of my friends will know.

Bankruptcy is a public record, so anyone who wishes to access bankruptcy records can do so. Do you have friends who go to Superior Court to read the dicey issues in neighbor's divorce file? If so, they will probably look at your bankruptcy file. If not, the most likely way your friends will find out about your bankruptcy is when you tell them. Obviously, it is your decision with whom to share this information. (A substantial percentage of my clients are referred by friends or family who appreciate the way I handled their bankruptcy)

Since the law changed, bankruptcy is no longer an option for many people.

Bankruptcy is still available for the overwhelming majority of people who need it. The law was changed in 2005 after a marathon lobbying blitz by the financial services industry. It is slightly more difficult to file bankruptcy. However, for people who are below median income, the only differences are increased costs and more documents necessary for the debtor to collect and send to the trustee and two classes to take.

Having no negative info on your credit report prior to bankruptcy leads to a higher score.

While intuitively this logic might make sense - better credit management prior to the bankruptcy means lower future credit risk? - the reality is that a positive payment history on an account prior to it being included in bankruptcy does very little toward minimizing the damage to your score. Simply the presence of bankruptcy information on the credit report and, most importantly, the length of time since the information first appeared, are the strongest determining factors.

All bankruptcy information stays on your credit report for 10 years, without exception.

Actually, only the public record of a Chapter 7 bankruptcy lasts for 10 years. All other bankruptcy references on a credit report remain for 7 years, such as:

1. Trade lines indicating "Account included in bankruptcy"
2. Third-party collection debts, judgements and tax liens discharged through bankruptcy
3. Chapter 13 public record items

You will have a low credit score for as long as the bankruptcy info remains on your report.

While it's true that you should not expect a high score following bankruptcy, if you manage your credit optimally in its aftermath you can be looking at a 700 score or higher after only about 4-5 years. Such a speedy score recovery requires a few things though:

1. Adding "positive" credit, such as secured credit cards and installment loans, to help offset the negatives on the credit report.
2. On-time payments on all remaining and recently acquired debt.
3. Low balances on credit cards that make up less than 25 percent of the credit limits

Bankruptcy will impact all consumers similarly, regardless of the amount of debt discharged.

Not true, as certain credit scoring factors specifically evaluate the magnitude of the bankruptcy, such as the amount of debt discharged and the proportion of negative to positive accounts on the credit report. This means that a relatively low debt total spread over only a few accounts included in bankruptcy can lead to a higher post-bankruptcy score than one for which the scope of the bankruptcy is more extensive.