Bankruptcy – like “recession”, “debt ceiling”, “default”, and other financial terms that sound foreboding and may not be fully understood – is a word that tends to scare people (especially because bankruptcy, unlike those other words, is likely more personal). However, most people don’t actually know what bankruptcy is or what it really means. Bankruptcy is simply a legal way to get rid of most of your debts and get a fresh financial start.
Confusion inspires fear, but clarity inspires confidence! That’s why if you are struggling financially, it is in your best interests to fully comprehend the implications of all of the options available to you, including bankruptcy, so you can make the right decisions about your future.
Here are some of the most popular bankruptcy myths that people believe, and the truth behind them that may set your mind at ease!
Bankruptcy Myth #1 – “Bankruptcy Means You’re A Failure”
Just because you file for bankruptcy doesn’t mean that you are a bad person, or a financially irresponsible person, or that you’re not as smart/hard-working/worthy of respect as other people. That isn’t true! Today’s economy is particularly hard to succeed in. Many of the financial decisions you may have had to make may have been beyond your control! If you were hit with an unexpected event, like losing your job, or getting divorced, or suffering from an illness or injury, you might find yourself in steep debt that you can’t repay. In fact, medical debt is the cause of more than 60% of all bankruptcies in the U.S.. That’s why bankruptcy laws are in place – to help good people who have fallen on hard times.
Bankruptcy Myth #2 – “Bankruptcy Will Ruin Your Credit Forever”
This is one of the biggest fears about bankruptcy, but it’s extremely unfounded. While filing for bankruptcy does stay as a mark on your credit for 7-10 years, depending on the particulars of your situation, the effects aren’t permanent, nor are they necessarily negative. First, if you’re filing for bankruptcy, it is likely that your credit is already poor. Second, bankruptcy lowers your debt-to-income ratio quickly and allows you to begin rebuilding healthy credit habits, which is a good thing for your credit score. You may even begin receiving credit card offers within weeks (although they will be secured with a low limit and may not be in your best interests to accept).
A report from the Federal Reserve Bank of Philadelphia revealed that those who filed for Chapter 7 bankruptcy in 2010 had an average credit score of 532.8 on Equifax….in the 6-8 months it took for their bankruptcies to be finalized, their scores jumped up to an average of 620. That’s almost a 100 point increase! Filing is likely to help your credit, not hurt it.
Bankruptcy Myth #3 – “Bankruptcy Means You Lose Everything You Own”
This is again another of the scariest bankruptcy myths that often keeps people from finding out more about bankruptcy, but again, it’s not true! You won’t lose everything – in fact, most people who file lose nothing. There are many assets protected under law as “exempt”, meaning that bankruptcy can’t take these assets from you no matter how much you owe. Every state’s laws are different, but for example, in Texas, up to $100,000 worth of property or $50,000 for single adults without children may be exempt, including family heirlooms, furniture, HSA accounts, jewelry, sporting equipment, firearms, pets, and more.
If you have more property that may be at risk of being liquidated to pay off your debts and that you want to keep, filing for a different kind of bankruptcy where you can pay a higher amount on a payment plan may be an option available to you.
Bankruptcy Myth #4 – “I Will Lose My Job & My Retirement If I File For Bankruptcy”
Retirement accounts such as pensions, 401ks, Roth IRAs, and others are protected by the Employee Retirement Income Security Act (ERISA) – they are exempt from debt collectors and cannot be seized in a bankruptcy filing, so don’t worry about losing them!
You also don’t need to worry about losing your job, or about having difficulty finding other employment. Both state and federal laws prohibit workplace discrimination based on debt or bankruptcy filing. This is true whether you work for a private company or a public one or a government employer.
Bankruptcy Myth #5 – “Bankruptcy Is Simple”
One of the most humorous and famous lines from the hit sitcom television series The Office is when Michael, the regional manager who is deep in debt and stressed about money, is advised by an employee in the kitchen area that bankruptcy is “nature’s do-over” and that he should declare it. Michael thinks about it, concurs, and then goes to the outer office and shouts “I…..declare….bankruptcy!”.
Unfortunately (as he later learns) you can’t just say that out loud and expect anything to happen; there is a complex, legal process involved that requires court communications, a ton of paperwork, accounting, creditor negotiations or communication, and more. It can be incredibly time-consuming to file, and any mistakes can end up costing you. That’s why bankruptcy lawyers go to law school and have to pass a bar exam to practice. It takes extensive legal knowledge!
Working with a Texas bankruptcy lawyer can help you understand what other bankruptcy myths you may have mistakenly believed and what your options are based on your specific financial circumstances. An attorney can also take care of the paperwork and communications for you and guide you every step of the way to a successful resolution!
Call Ted Machi & Associates, P.C., For A Complimentary Legal Consult
If you’re overwhelmed by massive debt, call our law firm today! Our lead attorney, Ted Machi, has over 25 years of experience leading clients through bankruptcy and out of debt. Because we are a small, boutique bankruptcy firm, we offer dedicated attorney attention and personalized customer service that larger firms can’t compete with! Book your free consultation today to get started and learn more.