Bankruptcy Myths

The average person in America knows very little about bankruptcy. Most people are aware of bankruptcy’s ability to dissolve debt and give the debtor a fresh start and most people know of someone who has filed and have heard of a bankruptcy attorney. Some of the information you might have heard is correct, but some is not. The purpose of this article is to dispel some of the most common bankruptcy myths.

1. Even if I file for bankruptcy creditors will still harass me and my family.

This is absolutely false. Bankruptcy law provides for an automatic stay. Simply put, 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 a debtor to attempt to collect, possess, or even contact the debtor in regard to the debt. If a creditor does not follow the rules, the debtor may have an action in the form of punitive damages. Basically, punitive damages are meant to punish a creditor 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 a bankruptcy attorney to answer. However what you need to know is this; once you file for bankruptcy, creditors must leave you alone or suffer the consequences.

2. If I file for bankruptcy it may cause more family troubles than I already have, maybe even divorce.

This is also false. There are two ways a debtor can file for bankruptcy voluntary and involuntary. Voluntary filing is done by the debtor. The debtor talks to a bankruptcy attorney or files a petition pro se and gets the bankruptcy process started. In an involuntary bankruptcy, the creditor forces the debtor into bankruptcy often times unwanted by the debtor. Voluntary filing is the result of family discussions about their options and possibly a bankruptcy attorney and then making an informed decision on the merits. Divorce is often associated with a bankruptcy with the latter filing. Voluntarily filing for bankruptcy gives the debtor a chance to set his terms and allows him a free choice for the bankruptcy.

3. If I file for bankruptcy the trustee will seize all of my assets and sell them to settle my debts with creditors.

Again this is false. While it is one of the duties of a trustee to sell assets in the estate, the trustee cannot necessarily reach all of your assets. There are many factors that must be examined before this happens. The type of bankruptcy as a lot to do with how much the trustee can seize. For example, a chapter 13 is a reorganization bankruptcy. Simply, the debtor keeps the majority if not all of his assets, and forms a repayment plan to satisfy interested creditors. Even in a chapter 7 filing the debtor gets to keep many assets. These are called non-exempt assets. The debtor’s house, car, clothing, furniture, life insurance, etc. are all non-exempt assets. These are just a few of the main assets. A bankruptcy attorney will be able to arm you with the information you need to keep even more personal property than you thought possible.

4. If I file for bankruptcy now, I will never be able to file again.

Surprise, this too is false. Filing for bankruptcy does not make you ineligible to file again. Without going into too much detail, just know the bankruptcy code allows a debtor to file for bankruptcy more than once. A bankruptcy attorney will clarify this for you.

5. If I file for bankruptcy I will never get credit again.

This is simply false. If this were true then nobody would file for bankruptcy. Americans depend on credit and this is no different than a debtor who has filed for bankruptcy. Several banks now offer credit on a secured basis to potentially risky customers. The debtor would put up a small amount of money so as to secure payment in the future. Once the debtor proves his ability to pay, credit limits get higher. As little as two years after a chapter 7, a debtor is eligible for mortgage loans on terms equal to someone who has not gone through bankruptcy. Creditors look more to a debtor's stability, as opposed to the fact you filed for bankruptcy

Can Bankruptcy Prevent You From Getting a Job?

In such a credit-conscious climate, one of your best weapons is to know your rights. While employers can legally terminate or deny a job or promotion to those with bad credit, Section 525 of the U.S. Bankruptcy Code prohibits discrimination based solely on bankruptcy. Talk to your bankruptcy lawyer about this.

Furthermore, Sections 604, 606, and 615 of the Fair Credit Reporting Act require employers to follow a very specific set of rules in order to review your credit reports.

Firstly, they must notify you in writing that your credit may be used in the job evaluation and obtain your written authorization before pulling your credit reports. But remember, sometimes they'll "notify" you in the fine print! In other words, they'll "tell" you without really "telling" you—if you know what I mean. So be sure you always read the fine print on all those forms the human resources person hands you during the interview and talk to a bankruptcy lawyer if you are uncertain.

Secondly, if your employer or potential employer sees something on your credit reports that may cause them to not hire you or fire you, they must send you a "pre-adverse action disclosure." (That sounds worse than a subpoena—doesn't it?) But the pre-adverse action disclosure is actually your friend. It gives you the time and an opportunity to fix incorrect information on your credit reports. However, the burden is on you to act fast and you should consult a bankruptcy lawyer if you need to.