MYTH: YOU MUST BE BEHIND ON YOUR BILLS TO FILE BANKRUPTCY.
TRUTH: No, this is simply not the case. Many of my clients are current on their accounts when they first come in. Oftentimes they have been transferring balances back and forth ("borrowing from Peter to pay Paul"), using home equity lines to keep current, depleting their savings or, worst of all, cashing in their legally-protected retirement accounts. Whatever the case, you need not be behind to file bankruptcy.
Honestly evaluate your situation. If you are not making progress towards reducing your debt.... If you think there is a good chance that years down the road you will still be paying your way out of debt, then the cost of keeping it current might be the loss of your home, savings, retirement, or quality of life due to anxiety. You have absolutely nothing to lose by scheduling a free and confidential consultation with an experienced bankruptcy attorney now. Not that you need to file now, but you need to know your options and how best to protect as much as you can if it becomes necessary later. Unfortunately, too many clients lose everything trying to stay afloat, just to file bankruptcy many years later when, had they filed sooner, they could have kept substantial assets AND substantially rebuilt their credit already.
MYTH: BANKRUPTCY IS UNETHICAL OR IMMORAL
TRUTH: The truth of the matter debunks the ridiculous notion that debt problems are inextricably linked to some metric of the debtor's character or moral fabric --- The truth, in fact, is that almost all my clients conduct their lives with the utmost integrity and were simply thrown an unexpected and unavoidable curve-ball. Often, it's a single devastating one, like a major medical event, or multiple curve-balls with a cumulative financial impact that can't be overcome without relief from the debts.
The moral difficulty is natural, because my typical client is a responsible person, but these pangs of guilt can cloud your judgment and your ability to restore financial order to your life. Bankruptcy is a Constitutional right, provided for in Article I, Section 8 of the United States Constitution. It is a legal process designed, in part, as a safety net to help good people get out of a bad situation. More than 90% of bankruptcy filings are traceable to job loss, illness, divorce, or other factors largely out of anyone's control. When good people have serious financial problems, they owe it to themselves and their families to consider bankruptcy. Good people who realize that they have a duty and a responsibility to put their families first often file bankruptcy. (Don't worry about the year-end profits of Chase or Discover or AmEx --- I promise, they'll be plenty profitable, and their CEO's will receive huge annual bonuses, even with the fraction of bankruptcy write-off's they already knew and expected they'd have.)
If you need to file, filing bankruptcy is actually one of the most positive, responsible, and honest steps you can take on behalf of your family and your quality of life. Businesses take advantage of the bankruptcy laws all the time. Even if you do not "technically" own a business, each of us is, in our own way, a one man/woman service business And, just like a business, you should look at your decision to file as a "business decision", weighing the pros and cons from a purely financial standpoint. That said, if you are still finding it difficult to file from a moral perspective, keep in mind the following:
•Bankruptcy discharges your legal (not moral) obligation to pay most debts. Once your bankruptcy is over, you can pay anyone and everyone back if you so desire. You can pay whatever you feel is appropriate and under whatever conditions you believe are just.
•Many great and famous Americans have filed for bankruptcy. Oftentimes, bankruptcy marked the turning point in their success: Abraham Lincoln, Walt Disney, Henry Ford, Henry Heinz, Milton Hershey, and Dave Ramsey, just to name a few.
•There is a great deal of Biblical support for bankruptcy. The previous seven year interval between Chapter 7 bankruptcies was based on Deuteronomy 15:1-2, "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..." Leviticus 25 speaks of a complete discharge of debts in fiftieth year jubilee and Ezekiel 18:13 condemns the charging of interest. According to Proverbs 22:7, "The rich rule over the poor, and the borrower is slave to the lender." Our country was founded by people who wanted a fresh start from the oppression of the rich, and inasmuch as slavery is not tolerated in our civilized society, the concepts and practice of freedom, forgiveness and redemption are central to our religious and societal beliefs.
MYTH: IT IS MUCH MORE DIFFICULT TO FILE OR QUALIFY FOR BANKRUPTCY SINCE THE LAW CHANGED IN 2005.
TRUTH: For most people the changes to the law have little impact. The major changes resulted in most Chapter 7 filers having to pass a "Means Test", which, in short, means your income for the past six (6) months must be below the "median income" for a family of your size. Based on my experience, 90% of the people who come to my office are under the median income level. For those individuals that are not, there are a number of expenses you can subtract to still qualify, and the United States Supreme Court weighed-in to tell us that we can disregard the means test if we can account for special circumstances surrounding your financial hardship. If you are over median, it is important to consult an attorney experienced in making these calculations and recognizing these issues.
In addition to the "Means Test", most people will have to complete a pre-filing credit counseling session and take a post-filing debt education course. While these last two requirements can consume three to four hours of time, they are not difficult and can be completed over the internet, without ever having to interact with a live person. I used to be jaded about these extra "hoops" to jump through, but now I'm a proponent..... these online courses, which you can do from home, provide my clients with valuable know-how insofar as budgeting and rebuilding credit after bankruptcy in a responsible way. They have resulted in a measurable reduction in the number of bankruptcy filers who have to file more than once.
MYTH: ALL OF YOUR PROPERTY WILL BE LIQUIDATED AND SOLD IN BANKRUPTCY.
TRUTH: Most bankruptcy cases filed by individuals are "no asset" cases, meaning the debtor or debtors keep everything they own. That is because bankruptcy law allows you to keep a very reasonable amount of property (like cars, furnishings, jewelry, equity in your house) that's necessary to facilitate your fresh financial start. The property you can keep is known as "exempt" property. What, and how much, you can keep varies from State to State. Here in Georgia, the exemptions are fair, therefore, most debtors do not lose a thing. Exemption laws can be complicated, and it's a dynamic ever-changing area, which illustrates why it's important to consult with an experienced Georgia bankruptcy lawyer.
MYTH: IF YOU HAVE MORE PROPERTY THAN ALLOWED, YOU CAN TRANSFER IT AWAY FIRST.
TRUTH: A Court-appointed trustee will seek to recover any property wrongfully transferred prior to a bankruptcy filing. Illegal or preferential transfers could lead to your bankruptcy case being kicked out, or loss of that asset anyway, or both. Even if you did not transfer property with any wrongful intent, you can still have problems, and the person to whom property was transferred could have that property taken away. This is often true of property you could have rightfully kept, if you had just not given it away beforehand. This is one reason why it is essential to consult with an experienced bankruptcy attorney prior to filing bankruptcy or attempting any transfer of any assets beforehand.
MYTH: BANKRUPTCY RUINS YOUR CREDIT FOR 7 TO 10 YEARS.
TRUTH: Ridiculous. In many cases, filing bankruptcy will improve your credit. This is true for many debtors, because once they receive their discharge they owe no debt. Their debt-to-income ratio is immediately better. Once your bankruptcy over, you can start the process of rebuilding your credit. The same creditors who would want you to believe it's wrong to file bankruptcy will troll the bankruptcy court dockets and target my clients, days later, by soliciting them for new credit (it's so distasteful, if you ask me). My point being, if you are proactive and responsible, get new credit in a modest and manageable amount, and pay all your obligations on time, it is possible to reestablish good credit in as little as eighteen months to two years. In fact, it is possible to get an FHA home loan in as little as two years after a Chapter 7 bankruptcy (HUD Guideline 4155.1 : 4.C.2.g).
On the other hand, many folks who choose not to file bankruptcy having many lingering, delinquent accounts that will drag their credit score down for years. Most people will find themselves unable to significantly improve their credit until all delinquent accounts are settled in some manner. Meanwhile, the stress and anxiety affects the quality of their lives. The truth is you can oftentimes wipe out all your debt through bankruptcy and then reestablish good credit before other folks have even settled their debt through some other means (i.e., counseling, negotiation, debt settlement, etc.).
MYTH: YOU CANNOT DISCHARGE TAXES OR MANAGE TAX LIENS IN BANKRUPTCY.
TRUTH: Contrary to a common misperception, income taxes can often be discharged in bankruptcy. Specifically, as long as you filed tax returns for the years in question more than 2 years ago, and as long as the tax years in question came due more than 3 years ago. For example, if you owe taxes for tax year 2016, and assuming you filed your tax return before the April 15th 2017 deadline, then you will likely be able to discharge and eliminate your tax debt for that year if your bankruptcy is filed on or after April 16, 2020 (three years after the due date). Many exceptions apply, so this illustrates why it's important to consult with a bankruptcy attorney. Also, tax liens can be vastly reduced and paid in installments through a Chapter 13.
MYTH: YOU SHOULD MAX OUT YOUR CREDIT CARDS BEFORE FILING BANKRUPTCY.
TRUTH: No, no, a hundred times, no. Borrowing money or charging purchases which you have no intent to repay is an express exclusion from the types of debt you can discharge in bankruptcy. Certain cash advances and luxury purchases made close enough to your bankruptcy filing are presumed to be fraudulent even if you had no fraudulent intent. It's important to discuss recent charges and payments with your attorney so as to avoid even the appearance of impropriety.
MYTH: YOU CAN ONLY FILE BANKRUPTCY ONCE.
TRUTH: Not true! You can file a Chapter 7 bankruptcy every eight years (not that we are advocating so). If circumstances arise that require financial assistance sooner, you can file a Chapter 13 bankruptcy four years after filing a Chapter 7 (allowing you to discharge part of your debt). In fact, you can file a Chapter 13 even sooner if necessary; you just won't receive a discharge. In effect, this means you can lower your payments to a manageable level for a few years, but when the Chapter 13 is over you will still owe the balance.
MYTH: IF YOU FILE CHAPTER 13 BANKRUPTCY YOU WILL HAVE TO PAY EVERYTHING BACK.
TRUTH: Chapter 13 plans range from plans that pay general unsecured creditors nothing to plans that pay 100%, with every variation calculable in between. How much you must pay in Chapter 13 is driven by the interplay between your budget, the value of your assets relative to the applicable exemptions, and the total of priority debts (like recent taxes) you have in addition to the secured debts you need and want to keep.
MYTH: YOU DO NOT NEED TO FILE BANKRUPTCY BECAUSE YOU ARE UNEMPLOYED OR JUDGMENT PROOF.
TRUTH: For some people this statement is true. If you have no assets and no income, your debts are uncollectible. However, you may want to file bankruptcy anyway to improve your credit. You may also expect to acquire some assets someday. And, while you may be unemployed now, when you go back to work your creditors could garnish your wages or your new salary may disqualify you from filing a Chapter 7. Some folks just need the peace of mind that comes from knowing they are debt free, even though their debts are not collectible.
Contrarily, you may be uninsured with medical needs or other circumstances may make it likely that you will incur additional debt in the future. In this situation, it may be best to put off filing as long as possible. Therefore it is still beneficial to seek an attorney's advice concerning if, or when, you should file bankruptcy.
MYTH: IT IS TOO LATE TO FILE FOR BANKRUPTCY IF YOU HAVE BEEN SUED, OR IF YOUR HOME IS ALREADY BEING ADVERTISED FOR FORECLOSURE, OR IF YOUR VEHICLE HAS ALREADY BEEN REPOSSESSED.
TRUTH?: False, False, False. Filing bankruptcy will stop a lawsuit, foreclosure, levy and/or wage garnishment. The Automatic Stay under section 362 of the Bankruptcy Code is a very powerful provision. This section of the Bankruptcy Code directs all creditors of a debtor to cease collection activities with very limited exceptions. A debt that is otherwise dischargeable before a lawsuit is commenced is generally still going to be dischargeable, even if the creditor has gotten a judgment. Bankruptcy allows us to avoid the lien created by the judgment. Furthermore, we can stop a foreclosure, and we can even get your car back..... but strict time limits apply.
MYTH: EVERYONE WILL KNOW YOU FILED BANKRUPTCY.
TRUTH: Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While it is true that bankruptcy is a public legal proceeding, the number of people filing is so massive, very few publications have the space, the manpower, or the inclination to run all of them, although one local newspaper (the one in Rome that, ironically, recently had to file bankruptcy itself) does print the names of those that have filed in Floyd County. Other than Floyd County, the other counties in NW Georgia apparently have real news to print and don't bother trying to shame, or gossip about, citizens of that community for seeking bankruptcy relief.
MYTH: YOU CAN BE FIRED FOR FILING BANKRUPTCY.
TRUTH: While there are some exceptions, Federal law prohibits most employers from discriminating against you for filing bankruptcy (11 U.S.C. Section 525). Of course, in reality, we all know that if an employer wants to discriminate they will find another reason as a pretext. That said, it has been my experience that most workers are better off having filed bankruptcy, especially when the alternative is to have numerous delinquent accounts and debts in default. I n the latter situation, the employee is under financial stress and has an incentive to steal or take kickbacks. If you have a security clearance coming up for renewal, many agencies will look more favorably at someone who has filed bankruptcy as compared to other individuals who have substantial outstanding delinquent accounts. If you are in this situation, it is best to find out your agency's attitude before doing anything.
MYTH: IF YOU ARE MARRIED BOTH SPOUSES MUST FILE TOGETHER.
TRUTH: No. Married individuals are not required to file together. It may be better to file together in some circumstances and for only one spouse in others. If you are contemplating divorce or are separated, it may be advantageous to file together, separately, or wait until your divorce is final. In this situation, especially if you have assets, it is imperative to get advice from a knowledgeable and experienced bankruptcy attorney.
MYTH: DEBT CONSOLIDATION/NEGOTIATION COMPANIES WORK BETTER THAN BANKRUPTCY.
TRUTH: Most debt consolidation/negotiation companies are scams, ruin your credit, and, ultimately, do not work. Not every company is running a scam, but the good ones are very rare. Most charge significantly more than a bankruptcy would cost and any concessions made by your creditors are up to the creditors, so your mileage may vary. Worse yet, many folks in consolidation programs don't realize until months or years later that they have to pay taxes on whatever debt was settled and that their credit was still ruined by virtue of being paid out of contractual terms. I have many clients who wasted thousands of dollars, just to be sued and harassed until they gave up and called me. Unlike attorneys, these companies are virtually unregulated. Bankruptcy is far more certain and there is no "scam" involved. Attorneys are heavily regulated by the courts and other administrative bodies to protect you.
MYTH: YOU WILL HAVE TO PAY TAXES ON THE DEBTS DISCHARGED IN BANKRUPTCY.
TRUTH: Debts discharged in bankruptcy are not taxed. Oftentimes, debts settled for less than full value or written off by creditors create a tax liability for the borrower. This is one reason bankruptcy can be preferable to debt settlement. More importantly for homeowners, the decision whether or not to file bankruptcy, apply for a short sale, or let a lender foreclose on their loan can have serious tax implications. If you are in this situation, you need to speak to a knowledge attorney or tax professional before doing anything or letting anything happen to you.
MYTH: MY BANKRUPTCY IS SO SIMPLE ANY ATTORNEY, EVEN THE LOWEST COST ATTORNEY I FOUND ON CRAIGSLIST COULD DO IT
TRUTH: There are simple bankruptcies. But even a "simple" bankruptcy can be complex without adequate preparation and advice. You might think you have an easy case, only to find out that the property you transferred a relative has been disqualified because it was transferred too recently, that the payment you made to a creditor could be considered a "preferential payment" by the bankruptcy trustee, that the retirement plan assets you expected to keep are not from a qualified plan, that the 401k loan repayment on your paycheck is not going to be considered reasonable, or that your recent credit card purchases could be considered fraud.
If you file bankruptcy without thoroughly reviewing your assets, debts, income, and expenses with an experienced attorney, one who follows bankruptcy case law closely and is familiar with the attitudes of the local judges and trustees, you could lose everything, your case could be dismissed, even your debts held to be permanently non-dischargeable. All too often, when I attend bankruptcy hearings, there is some poor debtor getting the third degree about something I can tell is going to be a problem, and there sits their attorney, pretending like they know what is going on when it is obvious to the experienced attorney that they have no clue there is even a problem.
If you are going to file bankruptcy, hire an experienced attorney. Do not risk making matters worse trying to save a few hundred dollars. If a budget attorney messes up your case, you may not find any attorney willing to take it over. If you can find one, likely they want far more money to fix the problem than they would have charged to do it right in the first place.
MYTH: YOU CAN HAVE A PARALEGAL/PETITION PREPARER DO YOUR PAPERS.
TRUTH: In truth you could, but I strongly advise against it. For all the same reasons you should not hire an inexperienced attorney, you definitely should not hire a paralegal. Paralegals cannot legally give you advice. Sure, many paralegals break the law and give advice, but often that advice is wrong. If you have any assets, bad advice can cost you everything. If you file a Chapter 7, you have no right to dismiss your case if things go wrong. There is no, "the paralegal said" defense. If a paralegal follows the law, all they can do is give you a questionnaire to fill out, then transfer the information onto the appropriate court form. If you are not well-versed in bankruptcy law and there is a problem, there is a good chance you will not know it until it is too late. If a paralegal does your paperwork, you will be required to fill out additional forms before your bankruptcy examination. Also, creditors will know you are unrepresented, making it more likely they will object to your bankruptcy if they were considering doing so already.
MYTH: YOU SHOULD CASH IN YOUR RETIREMENT FUNDS BEFORE FILING BANKRUPTCY.
TRUTH: Most retirement funds are "exempt" or protected in bankruptcy. If you decide to draw upon your retirement funds prematurely to pay creditors it could have serious income tax ramifications, jeopardize your financial future, and create an asset for creditors or the Bankruptcy Court to seize. Pulling retirement money out can be very expensive, as taxes and penalties must be paid on the withdrawal. In essence, you later realize that you've taken a bad problem (being in debt that we can discharge in bankruptcy), and made it worse (now owing tax debt that we can't discharge in bankruptcy). Many people that do so are stunned by the tax owed at the end of the year, long after the money is gone, creating yet another headache with the IRS. With the future of Social Security in jeopardy, financial planning for your future is more important than ever.
MYTH: YOU WILL LOSE YOUR BANK ACCOUNT IF YOU FILE BANKRUPTCY.
TRUTH: Banks or credit unions do not generally close your account unless you owe them money when you file. If you do owe them money, most credit unions will close your account, while most banks will keep it open. After filing bankruptcy, many banks and credit unions have a policy not to let new customers open an account unless it has been one year since their bankruptcy discharge. That said, I recommend opening a new bank account prior to filing bankruptcy if you owe your current bank/credit union any money prior to filing. Keep in mind that if you become delinquent on an obligation to your bank, your bank can probably seize money from your account at any time. For example, if you fall behind on your Wells Fargo Visa, Mastercard, car payment, etc., Wells Fargo can take the money you owe them directly from your checking or saving account without your knowledge or permission. Therefore, if you know you are going to fall behind on an obligation to your bank, you may want to close your accounts and reopen them at an unrelated bank.
Brian R. Cahn
Bankruptcy Attorney with over 25 Years of Experience
All Consultations are Absolutely Free and Confidential
Brian R. Cahn & Associates, LLC
222 East Main Street
Cartersville, GA 30120
MYTH: YOU MUST BE BEHIND ON YOUR BILLS TO FILE BANKRUPTCY.