Top 5 Bankruptcy Misconceptions
Many people hesitate filing for bankruptcy. No one wants to do it. But many, should do it. Making that determination is often the hardest part about filing for bankruptcy. There are many stereotypes perpetuated by non-filers that dissuade people from seeking the help they desperately need.
1. Will I ever get credit again after bankruptcy?Yes! You will be able to get credit after bankruptcy. Should you get credit? Well, that*s another story. My clients are getting solicitations for credit cards and car loans right after they file their bankruptcy cases. The reason? Well, lenders know that a debtor cannot file for chapter 7 for 8 years from the date of the previous filing. They also know that debtors have to take pre and post bankruptcy credit counseling courses. Finally, they know that debtors don*t want to end up down the same road again, and will be diligent with their future credit too. Once is enough for most debtors.
I*ve spoken to many former clients and with mortgage companies. Most have said that they are able to get a mortgage in about 2 years after a bankruptcy. This is to confirm that the debtor is back on track financially. As with all credit, watch the terms. Many of those *Bankruptcy OK* ads you see in the paper come with very high interest rates. So, start small. Pay off credit card usage in full each month. That will help you with your long term credit goals.
2. Will my credit score drop after filing bankruptcy?While it may dip slightly immediately after filing, most debtors find that their credit scores increase after bankruptcy. We pull credit reports for our clients before we file. The provider we use gives our clients their current credit score and it also provides a prediction of where the client*s credit score would be within a year after filing. They take into consideration past credit history, and pre-suppose the debtor will take out small debts and pay on time.
Most predicted scores that I see go UP about 50-100% within the first year after bankruptcy. Now, results vary. I am not guaranteeing any certain increase. I*ve seen a few go down (usually those who had nearly perfect credit to start with). But the likelihood is good for an increase within the first year. This might be the most popular of the top 5 bankruptcy misconceptions I hear on a regular basis.
3. Will I lose my belongings after filing bankruptcy?A debtor usually will not lose any assets when they file chapter 7. State and federal exemptions protect common and necessary assets that a debtor has. These exemptions do vary, so it is crucial to speak with your bankruptcy lawyer to plan your bankruptcy case. Often, the attorney can dictate the best time to file. Bonuses, tax refunds, inheritances and other non-frequent events can cause issues with exemptions. Your attorney can best advise you when to file and which exemptions you will use as well as steps you can take to maximize your coverage and limit any liquidations. Don*t go transferring or liquidating assets without advice from your lawyer, as there are rules to prevent this, and bringing those assets back to your case for liquidation!
In the event you have more assets than can be protected, you may want to consider filing for chapter 13. In a chapter 13, assets are not liquidated at all. You can keep them all. You need to design your chapter 13 repayment plan to pay back enough of your debts though, to protect these assets. Your attorney can help to make sure your chapter 13 plan satisfies the liquidation test.
4. Will my friends and family find out about me filing for bankruptcy?Generally, most bankruptcy cases go unnoticed by family and friends, unless you tell them! In most jurisdictions, bankruptcy filings are not published in the local newspaper. Your attorney can confirm this where you live. Now, in some major jurisdictions, like Chicago, the bankruptcy court call is published in the local law newspaper, here, it is the Daily Law Bulletin. This really only contains very minimal information, like the case number, the debtor*s name, and the name of the event/motion along with the moving party*s attorney and the judge*s name on the court call. The Chapter 7 court call is very short. Chapter 13 can have a few more. But, mostly attorneys read these law bulletins, most of the general population does not.
Bankruptcy is public though. So anyone can access case documents at the court clerk*s office or online for a small fee. But in general, unless you owe someone money (they will get a notice of bankruptcy filing in the mail), the vast majority of people won*t find out about a bankruptcy filing. Most employers don*t find out unless you tell them why you have to take off work (to attend the 341 meeting of creditors) or to stop a garnishment by notifying them of the automatic stay protection.
5. Can I still file bankruptcy if I am employed?Absolutely! While unemployment or non-employment may be a reason people file bankruptcy, it is not a requirement. To qualify for chapter 7, the debtor(s) must spend nearly all of their current monthly income on their monthly necessary living expenses. They must also pass the means test calculation. The means test reviews the income that a debtor and their household receives in the the 6 months leading up to the case filing. This average income is then compared to the median income for the debtor*s household size and where they live. When the income is below the median, chapter 7 is fine.
If the average income is above the median, then the debtor has to fill out a budget analysis (the means test) to see if they have disposable monthly income when using allowances and actual expenses. A debtor who *passes* the means test can file chapter 7. If they do not, they would have to look to chapter 13 (unless there were special circumstances). Chapter 13 also is called a wage earners bankruptcy, where you actually need steady income to make the chapter 13 work. This is usually from employment, but fixed income and household contributions can be considered as monthly income sufficient to support a chapter 13 repayment plan.