Bankruptcy Basics: From Fiction to Fact
Abraham Lincoln and Thomas Jefferson did it; so did Burt Reynolds, Donald Trump and Walt Disney. At one or more points all of these people have filed a personal or business bankruptcy. From national leaders, to actors and entrepreneurs, to everyday citizens, bankruptcy provides a valuable opportunity for many to close the door on debt and get a fresh start.
However, fear based on misconceptions, myths, inaccuracies and half-truths may prevent many from seeking protection under the Bankruptcy Code. Those facing mounting credit card debt, hospital or mortgage payments they can no longer afford, or a seemingly insurmountable mountain of smaller debts deserve to know the truth about filing for bankruptcy.
Whether juggling on-time and delinquent payments or entering into an agreement with a for-profit debt consolidation company advertised on TV or the radio, many people deny that they may need court intervention in order to resolve all their debt issues. The truth is that whether due to the economy, a recent injury or job loss, or any number of other factors, many people can and do rely on the bankruptcy court to stop creditor calls and lawsuits, halt foreclosure or repossession, and move toward financial health and stability.
Additionally, it is important to note that for-profit debt settlement companies do not generally guarantee discharge of credit card debt and often charge large, up-front fees before any settlements are actually reached.
Over 2 million people filed for bankruptcy in 2005. So while it is true that U.S. Bankruptcy Court filings are public records, aside from prominent people and major corporations, it is highly unlikely the general public will take any notice of bankruptcy filings. On the other hand, creditors will be notified of the filing and ordered to stop collection efforts immediately, including even contacting the debtor.
This fallacy keeps many people who should seek protection under the Bankruptcy Code from actually filing. It is true that the bankruptcy trustee will sell some of the debtors’ assets of the bankruptcy estate, but not all assets become property of the estate. In a Chapter 13 bankruptcy, the debtor can reaffirm some debts and make payments over time in order to keep the asset.
Even in a Chapter 7 bankruptcy, the debtor can keep valuable assets. Every state has exemption laws, which make certain property exempt from the bankruptcy estate. That means that people can keep valuable assets, even including a home and car, so long as the equity in those assets is not greater than the exemption amount.
People who are late on bills and have credit card balances that are maxed out have already likely damaged their credit. On the other hand, after a bankruptcy, people have a clean financial slate, usually no remaining unsecured debt, and have undergone mandatory credit and financial management counseling.
Moreover, there are many ways for people to get credit. Even after filing for bankruptcy, many credit card companies will still issue card offers, even if from subprime lenders with high interest rates. Banks offer another option, as many now offer credit on a secured basis to clients they view as potential risks. The debtor is first required to put up some money to secure future payments but as he or she proves the ability pay, the credit limit is raised.
It is possible for one spouse to file individually without the other. Spouses contemplating bankruptcy should speak with an experienced bankruptcy attorney to discuss the specific implications of a single spouse filing, including whether the credit card companies will hold the other spouse liable for the entire balance on the cards.
Many people file for bankruptcy after a life-changing event such as divorce, job loss, or serious illness or injury. These people want to pay their debts but are struggling, falling further and further behind every month. They may even liquidate assets and cash out pension or retirement funds. People contemplating doing so should talk to a bankruptcy lawyer immediately in order to make an educated decision after balancing the benefits and drawbacks of cashing out on an asset that would be exempted in bankruptcy, and incurring taxes and penalties while doing so.
Anyone mired in the quicksand of payments they can no longer afford, on top of penalties and late fees, topped by high interest rate accruals should discuss their bankruptcy options and bankruptcy alternatives with an experienced lawyer. An attorney can be a crucial guide through the bankruptcy process and can ensure that debtors get to keep their exempt property.