Bankruptcy Myths

So, it has been quite a while since any posts have been made here, but things have been busy. We’ve had a few calls lately referring to various myths about bankruptcy, so we thought it would be a good opportunity to discuss those. We already have a page dedicated to “Bankruptcy Misconceptions” here.

The following are a few common myths about bankruptcy that we would like to dispel:

1. “All my debt is medical debt, so I should file for medical bankruptcy.”
There is no such animal as “medical bankruptcy” although historically, medical debt seems to push people into bankruptcy. For example, see here and here.

2. “People who file bankruptcy are irresponsible/deadbeats/etc.”
Although the thought of filing bankruptcy, or knowing someone has filed bankruptcy may be like the cacophony of nails being drug across a chalkboard, just because someone has or is going to file bankruptcy does not mean they are irresponsible. No one wants to file bankruptcy; typically a person is faced with having to cover household expenses and providing for their family while being garnished for a bill they could not cover, or they are laid off of work, etc. Typically, a person does not choose to be in bankruptcy, they eventually find themselves in a situation that presents no reasonable alternative. Does a typical client have some debts such as credit card and debts for luxury items? Sometimes, but much of the time, those debts were incurred when it was a serviceable debt and the person was not insolvent. Many times people are financially secure until someone loses a job, or suffers a major setback due to medical problems, or a family tragedy. Sometimes life happens, and much of the time, life presents situations that are neither foreseeable, nor easily overcome.

3. “If you are going to file bankruptcy, you might as well max out your credit cards.”
Courts routinely consider such spending on the eve of filing bankruptcy as fraudulent. One of the bases for preventing a discharge of a debt is fraud.

4. “Bankruptcy ruins your credit.”
Although filing bankruptcy certainly isn’t going to help your credit in the short-term, a bankruptcy discharge will actually increase a person’s income to debt ratio to a more favorable factor. Lenders assess every loan transaction according to the risk of nonpayment. One of the factors a lender will assess is if a person has enough income to service his/her existing debts and the new loan. Since bankruptcy will discharge a majority of debt, a person coming out of bankruptcy, assuming he/she has steady income, is actually less of a risk than prior to filing bankruptcy.

5. “All debt is discharged in bankruptcy.”
Not all debt is discharged in bankruptcy. Certain priority, governmental, retributive and secured debt is not discharged. In addition, debts due to fraud or embezzlement are likewise not discharged under certain circumstances.

6. “Chapter 13 bankruptcy means I will be paying all my creditors back.”
Not necessarily. What must be paid in a chapter 13 is a calculation relating to income, assets not exempt, and other factors. Hence, it is important to hire a knowledgeable, experienced bankruptcy attorney to make sure you are getting as much as you can in your bankruptcy and to ensure you have someone to guide you through the process.

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