Understanding the Truth about Bankruptcy
There is no getting around it: Many people simply do not understand bankruptcy. Though filing helps countless individuals and their families regain control of their finances and build sustainable futures, many still believe that bankruptcy is a mark of failure or a process that will leave you without a penny to your name.
The problem with bankruptcy myths is that they color people’s perceptions of the institutions. There are many people struggling with debt who might overwhelmingly benefit from filing but choose never to explore the option based on what they have heard. For this reason, it is crucial that recurrent bankruptcy myths be clarified. Below, we debunk 5 of the most common bankruptcy myths.
Myth #1: You Will Lose All Your Property to Bankruptcy
This is absolutely not true. What first must be understood is that there are two types of consumer bankruptcy. Chapter 13 bankruptcy is reorganizational. It consolidates all of your outstanding debts and assesses your ability to at least partially repay. A bankruptcy court then mandates a 3-5 year repayment plan in which you pay a lump monthly amount determined by your level of monthly disposable income. In Chapter 13 bankruptcy, you do not lose any property at all as a result of the process.
Chapter 7 bankruptcy does not have a repayment plan and instead centers on a liquidation process. Liquidation involves the transfer of nonexempt assets to a neutral, appointed trustee, who sells (or “liquidates”) the assets to repay creditors. This is where people get the misguided idea that they will lose all of their property when filing for bankruptcy.
The truth of the matter can be found in the key word “nonexempt:” Only nonexempt property is subject to the liquidation process in a Chapter 7 bankruptcy. Those filing for Chapter 7 in Pennsylvania can choose between the state’s exemption schedule or a federal schedule available throughout the country.
These exemption schedules can be leveraged to shield your home, vehicle, wages, and personal property from the liquidation process. Many are amazed to learn how much of their property can ultimately be protected through careful and strategic use of exemptions.
An experienced bankruptcy lawyer can evaluate the extent of your assets and make recommendations on what exemption schedule to follow and what specific exemption categories to exercise. The bottom line is you will almost certainly not lose everything by default, and you will likely be pleasantly surprised by how much you can keep.
Myth #2: Filing for Bankruptcy Will Irreversibly Destroy My Credit
First, know this is in no way true. Bankruptcy filers can absolutely restore their credit over time. Second, if you are in a position of considering bankruptcy, your credit ratings are likely already suffering. Being delinquent on one or more lines of debt will cause significant damage to your credit score that will only worsen the longer you wait to take action.
In other words, when it comes to your future credit score, there is potentially more upside to filing for bankruptcy versus choosing to do nothing and letting your debts continue to accrue interest and penalties. It is true that, in many situations, filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy will result in an immediate hit to your credit rating. In some other cases, filing for bankruptcy can actually be seen as a net positive, with some filers seeing overnight rating increases.
Either way, it will take some work to restore your credit, but doing so is absolutely achievable. Successfully completing your bankruptcy and discharging debts is the first step. Most filers are then able to substantially improve their credit within 2-4 years of their bankruptcy.
To accomplish this, you should avoid taking out new loans if at all possible. If lending institutions are willing to grant them, loans will likely come with unfavorable strings attached when taken out so soon after a bankruptcy filing. Instead, focus on making on-time payments for essentials and consider using secured credit cards and revolving accounts. Be proactive in reporting positive activity to the credit bureaus to expedite score improvements.
Again, the broader point is that filing for bankruptcy will not doom your credit. Exercising financial prudence in the wake of a successful bankruptcy can help you efficiently rebuild your credit.
Myth #3: Bankruptcy Will Stay on Your Credit Report Forever
No matter what we say, we understand that there is a certain level of stigma associated with bankruptcy. You might be considered that filing could therefore associate you with the institution forever. We will cover below why bankruptcy is nothing to be ashamed of, but at the same time, we empathize with the concern that a bankruptcy could “follow” you forever by remaining permanently on your credit report.
The good news is that bankruptcy filings do not remain on a credit report forever. A Chapter 13 bankruptcy can remain on your report for as many as 7 years, while a Chapter 7 bankruptcy can persist for as many as 10 years. That may seem like a long time, but keep in mind that, as we discussed above, you will be able to significantly improve your credit much, much sooner.
Still, you might be concerned about the implications of having a bankruptcy on your report. Again, you will likely be unable to (and truthfully should try and avoid) taking out loans for the near future after filing for bankruptcy. Keep in mind, though, that many of the lenders that might balk at the appearance of a bankruptcy on a credit report will also object to a low credit score. A recovered credit rating can often clear many credit checks, even if a years-old bankruptcy is still on the report. After the 7 or 10 years, depending on for which type of bankruptcy you filed, though, it will be like the bankruptcy never existed.
Myth #4: You Can Discharge Anything in a Bankruptcy
This one is important and dangerous. Some people incorrectly assume that bankruptcy entitles filers to discharge just about any type of debt upon successful completion of liquidation or a reorganizational payment plan. This is not true: While completing a bankruptcy does allow you to discharge certain types of debt, other categories cannot be discharged. You cannot simply discharge all debt carpe blanche.
Evaluating what type of debt you have and hope to discharge is important in determining whether bankruptcy is right for you. Those who successfully complete a Chapter 7 or Chapter 13 filing will generally be entitled to discharge any remaining unsecured debts. Unsecured debts include credit card debt, medical bills, unpaid utility bills, and personal loans.
Bankruptcy filers are not able to discharge secured debts, or those “secured” by some form of collateral. This includes missed mortgage payments or automobile loan payments. Filers are also typically unable to discharge tax debts or student loans, though there are very specific conditions in which you m ay be able to pursue an authorized dischargement.
In other words, if a bulk of your debt is rooted in credit card and medical bills, bankruptcy is likely to help you discharge those debts. If most of your debt stems from missed mortgage payments and student loans, however, bankruptcy may be more limited in how it can directly assist you.
With that said, you should not automatically write off bankruptcy if you have a combination of secured and unsecured debt. Filing for bankruptcy gives you time to strategize and organize. The bankruptcy’s automatic stay halts all creditor actions, including foreclosure, repossession, and any legal action.
By discharging unsecured debts, you can free up funds to pay secured debts. At the same time, you can leverage bankruptcy protections to avoid negative creditor actions. For example, if you are behind on your mortgage and are facing an imminent foreclosure, filing for bankruptcy could give you the time you need to catch up on payments while also helping you discharge credit card debt.
Even though you cannot discharge anything and everything in a bankruptcy, and a smart deployment of the institution’s tools can help you navigate out of debt. A qualified bankruptcy attorney can work with you to determine which of your debts can be discharged through bankruptcy and develop a broader plan for how to tackle any remaining debts.
Myth #5: Filing for Bankruptcy Is an Admission of Failure
There is a pervasive, harmful idea that a person must make irresponsible decisions to end up in a situation where bankruptcy might be necessary. Some people assume bankruptcy filers wasted their money or recklessly spent money they did not have.
The truth is many who file for bankruptcy end up in financially precarious positions due to circumstances beyond their control. Unpredictable injuries, illnesses, sudden loss of income, and unexpected divorce can all result in situations where a previously financially secure person can become encumbered by debt through no fault of their own.
What is important to remember is that, no matter your circumstances, filing for bankruptcy does not make you a bad person. You are not harming anyone by filing and are instead exercising good judgment by exploring all of the means of financial relief available to you. Do not let negative perceptions of bankruptcy prevent you from helping yourself.
We Can Answer Your Bankruptcy Questions
Our team at Dethlef, Pykosh & Murphy understand how stressful living with debt can be. Filing for bankruptcy can help you keep mounting debt from taking over your life, and our bankruptcy lawyer is prepared to help you navigate the process. We can help dispel any concerns you have that are built on myths and illuminate the many benefits bankruptcy can confer. Our team can determine for which type of consumer bankruptcy you qualify for, evaluate what of your debts can potentially be discharged, and work with you to create a roadmap to a more sustainable financial future.
We are committed to helping you understand and navigate bankruptcy. Call (717) 975-9446 or contact us online to schedule a free initial consultation.