The average American knows very little about bankruptcy. Most people probably understand very generally that a bankruptcy can serve to eliminate debt and offer a ‘fresh start’ – but often know very little beyond this basic concept. Some of the information you might have heard is correct, but much of it is not. Misconceptions have become even more widespread after the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The purpose of this article is to dispel some of the most common bankruptcy myths.
Myth: Bankruptcy relief is no longer available.
Untrue. Almost all of the relief formerly available through bankruptcy survives in today’s bankruptcy code. The bankruptcy filing process is a little more complicated – and it can therefore be more difficult to find a qualified attorney – but the end result of a discharge of debts (and with that discharge the hoped-for “fresh start”) is still entirely attainable.
Myth: People who file for bankruptcy can’t get credit for 10 years.
Entirely untrue. Chapter 7 filers invariably receive unsolicited credit card offers after they get their discharge. The rates might not be quite as favorable as rates offered to others with perfect credit, but credit is undoubtedly available. The myth probably stems from the fact that the Fair Credit Reporting Act allows the reporting of a bankruptcy filing for 10 years. That much is true, but has no direct bearing on how quickly after bankruptcy one can obtain credit. Myth: Filing for bankruptcy is an embarrassment, or is somehow indicative of personal or moral failure. Untrue and unfair. The vast majority of bankruptcy filings stem from one or more of the following, all of which are beyond the debtor’s control : Loss of income resulting from layoff or failed self-employment business, large medical expenses resulting from injury or illness, divorce or separation, and high interest rates and/or penalties on credit cards resulting from the imposition of a ‘Universal default’ clause. (‘Universal default’ is the term for a practice in the financial services industry whereby a particular lender may change the terms of a loan from the normal terms to the ‘default terms’ when that lender learns that their customer has defaulted with another lender, even though the customer has not defaulted with the first lender.) This invariably means a drastic rate increase which, in combination with one of the other hardship factors, leads inevitably in turn to more late or insufficient payments, triggering a “snowball” effect. Bankruptcy laws were specifically designed to prevent honest debtors, who have been faced with these difficult or hardship circumstances, from being mercilessly harassed by creditors for accounts the debtor simply has no possible way of repaying. It should be no negative reflection on a person’s character for simply availing himself of laws that were written for these very reasons and situations.
Myth: Even if I file for bankruptcy, creditors can still harsss me and my family.
Completely false. Bankruptcy law provides for ‘automatic stay’ protection; that is, as soon as you file for bankruptcy a hold is put on all your outstanding debts and any creditor attempts to collect those debts. The law prohibits any creditor attempt to collect on or even contact the debtor in regard to a debt. If a creditor does not follow the rules, the debtor may have a cause of action against the creditor for ‘punitive damages,’ whereby a bankruptcy judge could actually punish a creditor with stiff fines and penalties for not following the procedures set out in the bankruptcy code. Whether a debtor has a cause of action against a creditor should be left to an attorney to answer. What is certain, however, is that the moment you file for bankruptcy, creditors must leave you alone or suffer the consequences.
Myth: If I file for bankruptcy, I will have to forfeit some or all of my assets.
For the vast majority of filers, this is not the case. Under chapter 7, you may claim certain of your property as exempt under federal law (for example the $10,775 exemption limit for household goods, furnishings, and appliances, and the $1,350 exemption limit for jewelry). A trustee may have the right to take possession of and sell the remaining property that is not exempt and use the sale proceeds to pay your creditors. In the vast majority of cases, however, the debtor has no assets above these statutory exemption limits, meaning that the debtor may “exempt”, and therefore keep, all of his assets.
Myth: Filing for bankruptcy could cost you your job.
False. Specifically, federal law (U.S.C. Sec. 525) prohibits any employer from discriminating against you because you filed bankruptcy. State laws may provide additional protection for filers, as often do union employment contract clauses.
Myth: Bankruptcy costs our society too much.
Credit card issuers are quite profitable and, industry-wide, boast some of the highest profit margins in the corporate sector. This is despite the relatively small percentage of loans discharged in bankruptcy, a percentage that is factored into their budgets and compensated for by the percentage rates they charge. Our economy has, overall, benefited enormously by the purchasing power facilitated by credit – one need only consider the widespread economists’ predictions of pervasive and lasting harm to the American economy should the ongoing subprime mortgage crisis be allowed to cause credit to ‘dry up’. And again, the pricing of credit takes into account that not everyone will be able to repay. The “$400 per family bankruptcy tax” bandied about in Congress was a number picked out of the air by a bank lobbyist – no surprise there – who made an arithmetic error in the process.
Myth: Filing bankruptcy causes family trouble and divorce.
Wrong. Bankruptcy eliminates debt, which in turn cannot help but eliminate financial stress. Filing bankruptcy is the solution to the problem, not an additional problem. Although making the decision to file bankruptcy might be a difficult one, the relief provided will lift a huge weight off of you and your spouse. The removal of financial stress will in all likelihood help your relationship.
David Romito is a Bankruptcy Attorney handling matters in Pittsburgh and the Western District of Pennsylvania. For more answers to your bankruptcy questions, please visit his website at Pittsburgh Bankruptcy Attorney .