Myths of Bankruptcy

Since the implementation of the Bankruptcy Reform Act of 2005, the bankruptcy process has undergone some changes. Unfortunately, these changes have been either misreported or misunderstood, leading many people who might benefit from such a move to reject bankruptcy outright.
All of the following statements are FALSE...

Bankruptcy Relief Is No Longer Available –
FALSE ! – Almost all of the relief available prior to the Reform, survives in today’s code. It is somewhat more involved but it still works.

You Can’t File Bankruptcy If You Have a Job –
FALSE ! – The “means test” was developed to divert some filers who make more than the median income for households of their size in their state of residence to Chapter 13. You MUST have a job to file a plan in Chapter 13.

Medical Bills Can’t Be Discharged in Bankruptcy –
FALSE ! – Almost all unsecured contract debt, like credit cards, personal loans, and medical bills remain dischargeable in bankruptcy. The law as-described-by-bill collectors might imply otherwise.

Chapter 13 Plans Require Repayment In Full of Debt – FALSE ! – 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 13 is driven by the interplay between your disposable income, the value of your non exempt assets, and the total of priority debts you have.

Bankruptcy Represents Personal or Moral Failure –
FALSE ! – Over 90% of bankruptcies are traceable to job loss, illness, or divorce, factors largely out of anyone’s control. Bankruptcy is a fresh start.

People Who File Bankruptcy Can’t Get Credit For 10 Years – FALSE ! – People in Chapter 13 borrow money during the case. People who file for Chapter 7 obtain credit after discharge. The rates are higher, but credit is available. This myth probably got its start in the fact that the Fair Credit Reporting Act allows the reporting of a bankruptcy for 10 years.

You Lose Everything You Own in Bankruptcy –
FALSE ! – Over 95% of bankruptcy cases filed by individuals are “no asset” cases in which the debtor keeps everything he owns. That’s because exemptions provide for assets that the debtor can keep and some assets, like pensions, are beyond the reach of the court. That exemption may allow you to keep your home and many assets.

Bankruptcy Costs Society Too Much –
FALSE ! – Credit card issuers are wildly profitable despite the small percentage of loans discharged in bankruptcy. Banks, however, have cost society an incredible amount.

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-- Written by Scott Reese