Banking & Finance, Law, and Small Business & Startups

You think you know bankruptcy, but you may be surprised

June 27, 2018
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No one wants to be in the position of filing for bankruptcy. On top of the obvious financial stress and anxiety, those filing for bankruptcy also face the stigma of being considered a “deadbeat” who doesn’t pay their bills.

While there certainly are people whose bad choices led to their financial predicament, the reality is that many people who find themselves considering bankruptcy had little or no control over their financial losses and debts. Unexpected medical illness, divorce, job loss, a downturn in the economy — any of these can place significant financial pressure on an individual or a small business.

From there, the effect can snowball. An inability to pay debt obligations leads to lawsuits, garnishments, foreclosures, liens … the list goes on. These difficult circumstances have nothing to do with someone being a “deadbeat,” and a bankruptcy is sometimes the only way to navigate these issues and get someone back on their feet.

Along with the misconception about who files for bankruptcy, there are many other misconceptions bankruptcy practitioners often hear. They include:

My credit score will be ruined, and I will never be able to get a loan

There is no denying your credit score is affected by filing a bankruptcy, but how much harm a bankruptcy does will depend on what your credit score is at the time you file. If you have high debt balances, delinquent accounts, or lawsuits filed against you, your credit score already is going to be low and your ability to obtain a loan is probably very limited or nonexistent. While filing bankruptcy may lower the score some, once the debt is discharged you will be able to start rebuilding your score. In fact, most individuals can qualify for a mortgage two years after receiving a bankruptcy discharge and even sooner for a car or personal loan.

I will lose all of my assets if I file a bankruptcy

The bankruptcy code provides certain exemptions to protect your property from creditors. Even if there is something that cannot be protected, there still are options to keep your property in either a Chapter 7 or Chapter 13 bankruptcy. The reality is the majority of individuals who file for bankruptcy are allowed to keep all of their assets.

I can’t get rid of my tax debt through a bankruptcy

A huge benefit of bankruptcy is the ability to discharge income tax liability if you meet certain requirements. Bankruptcy also can remove tax liens and provide the ability to pay back tax debt without interest and penalties. I have personally helped small business owners discharge hundreds of thousands of dollars of tax liability through a bankruptcy, which they had no idea could be accomplished.

A bankruptcy can’t save my house

A bankruptcy can stop a foreclosure sale and give you the ability to catch up on missed payments. It also can allow you to remove a second mortgage if your home is worth less than your first mortgage. Even loan modifications are possible while in a bankruptcy.

Everyone will know I filed for bankruptcy

Although bankruptcy is considered public record, it is not posted in the newspapers or discoverable in an ordinary Google search (unless, of course, you are a celebrity or huge corporation). Typically, in order to see if someone has filed a bankruptcy, you would need to pull a credit report, search courthouse records, or pay a fee to search a bankruptcy database.

If you are married, both spouses have to file bankruptcy together

Being married does not require a joint bankruptcy filing. Depending on your circumstances, it may be more beneficial to have only one spouse file.

Don’t let these and other misconceptions about bankruptcy keep you from exploring all of your options. If unforeseen circumstances have placed you in a difficult financial position, it is important to consult with a qualified attorney so that you understand all of your options and what a bankruptcy could do for you.