Bankruptcy Myths

In this post, Karen Ware clears up some of the most common misconceptions about bankruptcy. Law Offices of Karen Ware PC is a Chapter 7 and Chapter 13 bankruptcy lawyer serving Ventura, Ojai, Oxnard, Camarillo, Thousand Oaks, Moorpark and Simi Valley.

Debunking Common Bankruptcy Myths

Many times people have done quite a bit of online research before they call our office for a consultation.

This usually makes our job easier– we appreciate having informed clients.

But, there is also a lot of inaccurate information about bankruptcy on the internet.

In this post we discuss some of the most common misconceptions about bankruptcy.

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Myth: I’ll lose my home or vehicle if I file bankruptcy.

Reality: People typically keep their homes and vehicles when they file bankruptcy.

If you can exempt the equity in these assets using your bankruptcy exemptions, you will likely be able to keep them when you file bankruptcy.

When a person “gives up” an asset in bankruptcy, it is often part of an overall strategy.

For example, if a person has multiple vehicles and wants to reduce monthly expenses, they might surrender a vehicle and discharge the loan as part of their bankruptcy.

Myth: I can’t file Chapter 7 bankruptcy if my income is above median for my household size.

Reality: Whether or not you can file a Chapter 7 bankruptcy depends on many factors. These include your income, expenses, and type of debt and amount of debt you have. It will also depend on your assets.

The bankruptcy means test helps determine whether or not a person can file their bankruptcy under Chapter 7. In the means test calculation, average monthly income is compared to a person’s living expenses. These expenses are limited to IRS standard values in many categories. Learn more about the bankruptcy means test here:  What is the Bankruptcy Means Test?

For some categories of expenses, bankruptcy filers can use their real-life expenses on the means test.

This means high income households are often able to file Chapter 7 because they also have high expenses.

Some expenses that might enable a high income household to file Chapter 7 bankruptcy include:

  • Childcare expenses,
  • Ongoing medical expenses,
  • Mortgage payments,
  • Vehicle payments, and
  • Priority taxes.

Myth: I must wait 10 years after filing bankruptcy to buy a home.

Reality: Most people can qualify for conventional mortgages approximately two years after filing bankruptcy.
 
It is true a Chapter 7 bankruptcy can appear on your credit report for up to ten years. But, the question you really want to ask is how long bankruptcy affects your credit score.
 
Credit scores recover pretty quickly from bankruptcy filings, partly because zeroing out your debts has a positive effect on credit scores. This positive effect counteracts the negative credit score effects of a bankruptcy filing. You can read more about how bankruptcy affects credit here: How Does Bankruptcy Affect My Credit?

Myth: If one spouse files bankruptcy, the other spouse must join the filing.

Reality: A person is not required to file bankruptcy (“join the filing”) just because their spouse has filed bankruptcy.

Whether it makes sense to have a spouse join a bankruptcy filing will depend on many factors. Examples include:

  1. How much debt does each spouse have?
  2. Is there any joint debt?
  3. How much community debt is there?
  4. What are the community assets and separate assets?
  5. Is there a divorce on the horizon?
  6. Is there a strategic reason to preserve one spouse’s credit in the short term?

Myth: I can’t discharge taxes in bankruptcy.

Reality: Often you can discharge taxes in bankruptcy.

To be sure, you must meet several criteria to be able to do so. But, it is possible. A large percentage of bankruptcy filers discharge taxes as part of their bankruptcy strategy.

See this post for more information: Can I Discharge Taxes in Bankruptcy?

Myth: Bankruptcy is a “last resort” strategy.

Reality: People who file bankruptcy tend to be proactive people and long-term planners.

Sometimes they are using bankruptcy’s fresh start to help them reach their long-term financial goals.

Sometimes they already have assets or good income they need to protect from liens, levies, and garnishments.

Myth: If I have to file Chapter 13 bankruptcy, I’ll be forced to pay back 100% of my debts.

Reality: People need to file their bankruptcies under Chapter 13 for various reasons.

For example, you might need a type of help only available in Chapter 13.

Be assured your monthly plan payment amount will still be calculated according to your ability to pay (among other factors.)

Many people in Chapter 13 have very low monthly plan payments.

Once they complete their payment plan successfully, the bulk of their unsecured debts are often discharged just as they would have been under Chapter 7.

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These are just a few of the bankruptcy myths we often see online. 

If you have a question, don’t be afraid to ask us.

Chances are other people have the same question.

We are happy to answer any questions you may have during our free initial consultation.

Bankruptcy Myths

Can I file Chapter 7 if my income is above median? Can I discharge taxes? Do I have to file if my spouse files? Do I have to wait ten years (after filing bankruptcy) to buy a home? We discuss some common bankruptcy myths in this post.

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