A variety of bankruptcy myths persist in popular imagination. The falsehoods about the Michigan Chapter 7 and Chapter 13 bankruptcy processes unfairly discourage Metro Detroit residents from seeking the debt relief to which they are legally entitled.
This Article discusses a few of the most popular bankruptcy myths—and why they are dead wrong.
If I file bankruptcy, my credit will be ruined for 10 years.
It is true that a Chapter 7 or Chapter 13 bankruptcy will remain listed in the “public records” section of your credit report for 10 years from the date of the filing of the bankruptcy. But this is not the same as having “ruined credit.” A bankruptcy is certainly something you will have to do some work to recover from with regard to your credit report once you receive your discharge, but there are basic steps you can take to accomplish this that will have your credit on the road to full recovery in just a couple of years.
Even immediately after a bankruptcy discharge, you will certainly be able to apply for new credit cards and even a car loan if you meet other lending requirements—such as employment—but the only real question will be what interest-rate you will pay, not whether you can get the credit at all.
In addition, contrary to popular belief, a bankruptcy discharge can sometimes help to improve your FICO credit-score because a bankruptcy discharges all of your dischargeable debt, immediately improving your debt-to-income ratio.
Further, if you have already suffered negative reporting due to a foreclosure, short sale, collection lawsuit judgment, repossession, or missed payments, your credit has likely already been negatively affected.
My bankruptcy will ruin my spouse’s credit.
Your bankruptcy is your bankruptcy alone. Although, if you are married, your spouse’s income will have to be taken into consideration as to your general eligibility for Chapter 7 and in a few other ways, but your bankruptcy will not appear on your spouse’s credit report—nor will it discharge any of your spouse’s debt.
If I file Chapter 7, I will lose all of my stuff.
When you file a bankruptcy petition, you are indeed creating a “legal estate” containing everything you own, no matter where it is located and no matter whether it has any value in your estimation or not, and that “bankruptcy estate” is under the administration of the Chapter 7 Trustee, whose job it is to seize the assets in your bankruptcy estate and sell them off or liquidate them for the benefit of your creditors.
However, the Bankruptcy Code provides what are called “exemptions,” which are bits of the bankruptcy statute that allow you to “exempt,” or remove, from the bankruptcy estate certain types of property up to certain dollar-value limits. In most Chapter 7 bankruptcies, no one loses anything at all because the exemptions are sufficiently broad to protect most of what the average person tends to own.
That said, it is not always realistic to expect that you won’t or shouldn’t lose anything to the Chapter 7 Trustee’s liquidation power: some Chapter 7 bankruptcy cases simply carry that extra cost: for the price of your attorney’s fee, the court’s filing-fee, and the value of some amount of your personal assets, you will be entitled to walk away scot-free (and tax-free) from a potentially limitless amount of debt. However, in most cases, the Chapter 7 Trustee would rather work out a payment with you than actually take your property.
An experienced bankruptcy attorney will be able to assist you with this negotiation. If, because of this liquidation, however, a Chapter 7 bankruptcy is completely unappealing, a Chapter 13 bankruptcy, in which no property is liquidated at all, should be considered.
If I file Chapter 13, I have to pay back all of my debt.
This is one of the most common bankruptcy myths. A Chapter 13 bankruptcy is, essentially, a 3-5-year payment plan in which you pay back some of what you owe to your creditors according to what you can afford to pay back after necessary household expenses are taken into account over that period of time.
If your income is significantly higher than your household’s monthly average expenses, it is possible that you will pay back 100% of your debt, but this is in the minority of Chapter 13 cases. In a typical Chapter 13 bankruptcy, much less than 100% is repaid, and the balance totally discharged afterward, just as in a Chapter 7.
That said, some sorts of “priority” debts must be paid back in full through a Chapter 13 payment plan, such as recent tax debt, child support arrearages, wages owed to former employees or pension plans, and others.
See What Is A Chapter 13 Bankruptcy Payment Plan? for more information.
Tax debt is not dischargeable.
While the dischargeability of tax debt is one of the more complicated analyses in bankruptcy practice, in some cases, even income tax debts owed to the Internal Revenue Service or the Michigan Department of Treasury can be discharged. An experienced bankruptcy attorney should be consulted to make this determination, however, as the factors that must be considered in this analysis are complex.
Even when tax debt cannot be entirely discharged, it can always be repaid at 0% interest through a Chapter 13 bankruptcy payment plan, which is a better rate of interest than the IRS typically provides in even its most generous repayment plans.
I don’t need an attorney to file bankruptcy.
PROBABLY NOT TRUE.
It is your legal right to pursue a bankruptcy filing pro se—without an attorney. However, bankruptcy is a highly specialized area of practice that even most general practice attorneys are unable to competently handle. Even for what seems like a “simple” Chapter 7 bankruptcy, there is much more to the process than simply filling out some forms and filing them with the Bankruptcy Court. Failing to understand properly which exemptions to place with which type of personal property alone can pose a major risk to your assets. Failing to understand properly what information needs to be disclosed in a Chapter 7 petition can pose a risk to your successful discharge of debts and can even result in a Federal criminal penalty.
A Chapter 13 bankruptcy, as Attorney Hilla recently heard one of our local Eastern District of Michigan bankruptcy judges inform a pro se debtor in court, simply requires the assistance of experienced legal counsel to be successful. It is a far more complex process even than Chapter 7 bankruptcy.
That said, there are successful pro se bankruptcies filed, and it would be untrue to say anything to the contrary. However, given the severe consequences for an unsuccessfully prosecuted bankruptcy and the financial benefits of a successful one, saving a few bucks on attorney fees may not be the best investment a consumer can make.
My reputation will be ruined if I file bankruptcy.
This is likely one of the most widespread myths about bankruptcy out there. A bankruptcy is not published in any local periodical or newspaper; there is no significant public dissemination of bankruptcy filings. While it is true that it is possible for any member of the public who knows how to do so to review recent bankruptcy filings in the Federal Court System’s PACER document filing database, the reality is that nobody does this and that, if someone really wanted to know if you have filed for bankruptcy, they would have to obtain a PACER account and then log on specifically to search for you. Do you really know anybody motivated to do this? Odds are that you do not.
The practical reality is that, unless you tell people that you filed for bankruptcy, nobody is probably going to find out about it.
Where a bankruptcy can be made more public is, obviously, in a situation calling for a review of your credit-report. If you are applying for credit or even applying for a job, the bankruptcy will be known to those parties reviewing your credit report under those circumstances. (See below for more information as to the impact upon potential employment.)
Attorney Hilla has filed successful bankruptcies for individuals with teaching certifications, real estate licenses, insurance licenses, stock broker licenses, and even high-level military security clearances. None of those individuals has suffered any detrimental impact beyond the need to spend a few years rebuilding their credit.
I won’t be able to get credit after filing for bankruptcy.
This is a bankruptcy myth that was once a little bit more true than it is today. Once upon a time, it was indeed rather more difficult to obtain credit after a bankruptcy discharge. Then, beginning in 1993, with President Clinton’s signing of several legislative bills deregulating the credit and finance industry, lending restrictions for post-bankruptcy discharge consumers loosened.
Now, it is only a slight exaggeration to say that, almost as soon as you receive your discharge, you will be inundated with credit card offers. All with terrible interest-rates, naturally, but offers you will receive. Beyond that, however, it is entirely feasible to obtain new financing for an automobile or other consumer credit, though, again, the interest-rate charged will be the question at hand for some time.
A new mortgage within a few years of a bankruptcy discharge is likely not a realistic expectation, however, financing for new mortgages is difficult at best at this time even in circumstances not involving a bankruptcy due to the ongoing nationwide mortgage crisis.
Filing bankruptcy is immoral.
Although morality is subjective and everyone abides by their own sense of what is and what isn’t a moral obligation, bankruptcy is a legal option that everyone in the United States has a right to pursue under the US Constitution and Federal law. It is an option offered by law because you are more useful to the United States if you are purchasing goods and services and keeping your children well-fed and well-educated. If you are doing nothing but breaking your back working in order to make minimum credit card payments, you are doing the US economy less good than you might otherwise.
Furthermore, the concept of bankruptcy dates back through the US Constitution to the English Magna Carta—the medieval English document reducing the power of the monarchy in England and upon which our Constitution is premised—and further back yet to the Book of Deuteronomy.
Deuteronomy 15:1-2 says, “At the end of every seven-year period you shall have a relaxation of debts, which shall be observed as follows. Every creditor shall relax his claim on what he has loaned his neighbor; he must not press his neighbor, his kinsman, because a relaxation in honor of the Lord has been proclaimed.”
There is no moral virtue in forcing yourself to maintain a difficult lifestyle when a debt is merely a function of legal contract under the same legal system that provides for the release of debt through bankruptcy.
Whichever debt you feel morally obliged to satisfy, further, odds are pretty good that you’ve already repaid it several times over in interest.
I can file for bankruptcy on some debts and leave others out of it.
The Bankruptcy Code requires that all debts and all assets must be disclosed in your bankruptcy petition. Bankruptcy has a “nuclear” effect: all of the debts, even an undocumented personal loan owed to a family member or friend, is treated, whether you want them to be or not.
If you do have some debts, such as a personal loan from a family member, that you do feel a genuine personal obligation to satisfy, there is nothing in the Bankruptcy Code or in Michigan state law preventing you from voluntarily repaying the debt after the bankruptcy is filed, even though the creditor no longer has the legal ability to pursue you for collections.
A note of further warning, however: there may be unpleasant implications for the family member or friend if you hurry to repay them prior to filing a bankruptcy as well. Consult an experienced bankruptcy attorney to discuss your filing before doing anything of this sort.
It’s OK to transfer property out of my name before I file bankruptcy so that it is safe from the Trustee or creditors.
DEFINITELY NOT TRUE!
Both under Michigan state law and under the Federal law of the US Bankruptcy Code, certain transfers of property or cash assets or other value is considered to be fraudulent. Fraudulent transfers made anytime in the six years prior to filing a bankruptcy can result in the transfer being “avoided” (undone) by the Bankruptcy Trustee, can result in a denial of your bankruptcy discharge on grounds of “bad faith,” and can even result in a Federal criminal charge of the felony crime of Bankruptcy Fraud being brought against you.
No property that you own is worth the risk. Consult an experienced bankruptcy attorney if you are considering filing for bankruptcy before selling property, re-titling property, quit-claiming property, or doing anything else that constitutes a transfer.
If I file for bankruptcy, I will lose my house.
NOT TRUE—UNLESS YOU WANT IT TO BE!
The impact upon real estate is different depending upon whether you are filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. However, one fact is common between both Chapters: if you are current on your mortgage payments when you file for bankruptcy, you will not lose your home.
If you are not current on your mortgage payments and are ready to move away from the real estate in question, a bankruptcy is one of the best ways to surely and cleanly walk away from the home without being pursued, as Michigan law entitles mortgagee creditors to do, for a deficiency judgment, which is the amount of your mortgage loan left over after a foreclosure sheriff’s sale of the home for (typically) less than the loan amount. You can be pursued for that deficiency anytime within 6 years of the foreclosure’s completion in Michigan: a judgment on such a debt is effective for 10 years, renewable after that for another 10 years. Additionally, creditors may also “charge off” the debt, which can result in taxable liability for you.
After a bankruptcy surrender of the property, you cannot be pursued for collection of the debt, and you will suffer no taxable liability as a result.
If you are behind on your mortgage payments but want to keep your home, a Chapter 13 bankruptcy can allow you to catch up your payments and avoid foreclosure entirely.
No one will hire me for a job if I file for bankruptcy.
Federal law under the US Bankruptcy Code prohibits termination of employment for the filing of a bankruptcy. It also prohibits denial of new employment because of a past bankruptcy filing. Certain case-law in the Federal Bankruptcy Courts has muddied this law a little, depending upon where you life and depending on whether you are a “public” employee or a “private” employee, or seeking employment of one or the other of those varieties.
Many employers these days, however, do run a credit report and check your credit prior to agreement to employ you. Under these circumstances, a denial of employment based solely upon a past bankruptcy filing may be a difficult to thing to prove, but, nevertheless, it remains illegal to so discriminate.
In any case, on a practical level, more people have filed for bankruptcy than you realize. If employers denied employment for availing yourself of an entirely legal option, their choices for good employment candidates would be few and far between. If you are in dire financial need, the short-term, immediate benefits of a potential bankruptcy should outweigh vague fears of uncertain employment prospects at some unclear point in the feature.
There is a minimal amount of debt I need to file for bankruptcy.
Another very common bankruptcy myth. There is no minimum amount of debt needed in order to file for bankruptcy. There is no justification required of any sort for the filing of bankruptcy. You do not need to have a “good” reason for pursuing a bankruptcy; it is a legal option you are simply entitled to.
That said, you may file bankruptcies only so often: no more frequently than every 8 years for Chapter 7 bankruptcy, for instance. If your level of debt is quite low, generally speaking, you will want to be careful to ensure that you are not utilizing the option of bankruptcy prematurely, when you may require it more urgently sometime in the next several years.
Otherwise, what is a difficult amount of debt varies from person to person and household circumstance to household circumstance. What one household can manage with no problem may be cripplingly impossible for another. The Hilla Law Firm, PLLC will review your circumstances with you to determine whether a bankruptcy is truly the best option for you at any given time.
I have to file bankruptcy with my spouse.
You may file singly or jointly regardless of whether you are married or not. If you are married, your spouse’s income will still be considered for purposes of calculating your “household income” and the Chapter 7 bankruptcy means test for eligibility, but your bankruptcy will not otherwise affect your spouse’s property, credit, or debts.
For over 16 years, The Hilla Law Firm PLLC has successfully eased Metro Detroiters through the Chapter 7 and Chapter 13 bankruptcy processes.
To learn more and to discuss your options for a fresh start and relief from debt, contact us at (313) 380-0492 or click the button below to schedule your free initial bankruptcy consultation.