Monday, October 21, 2013

Top Misconceptions About Bankruptcy

Top Misconceptions About Bankruptcy

Bankruptcy law is complex and takes time to master. A basic understanding of the Bankruptcy Code and its principles is essential for effective management of the financial affairs of individuals and businesses. There are many misconceptions about bankruptcy.
1. The debtor must be flat broke to file for bankruptcy. Wrong. With limited exceptions, the only requirement to file for bankruptcy is that the debtor cannot pay bills as they come due. A “debtor” is an individual or entity that owes money. 

Because individuals and businesses often wait until they are flat broke to seek bankruptcy advice, this delay limits their options, some of which may help them reorganize their finances and keep part or all of their property. For example, an individual normally waits until the day before a foreclosure sale to seek bankruptcy advice; had he sought advice earlier, his chances of losing the property would have been diminished significantly.
2. An individual who files for bankruptcy will not qualify for credit in the future. Wrong. The fact that an individual files for bankruptcy will appear on an individual’s credit report for up to 10 years, which may seem draconian but is not permanent.

Any individual considering filing for bankruptcy probably has poor credit already. Filing for bankruptcy may be the best bet to “get good credit” again, because when a debtor files for bankruptcy under Chapter 7 of the Bankruptcy Code and receives a discharge (a court injunction relieving the debtor of the obligation to repay most debts and preventing creditors from collecting for the same), the debtor cannot receive another discharge under Chapter 7 for at least six years.

3. An individual who files for bankruptcy cannot buy a house. Wrong. Like all lending institutions, mortgage lenders are willing to take risks with a debtor as long as the lender has enough security. This generally means charging higher interest rates and requiring personal guarantees. If a person who had filed for bankruptcy in the past applies for a mortgage and can fund a sufficient down payment, most banks will approve a mortgage loan.

4. Taxes cannot be discharged in bankruptcy. Wrong. Certain taxes are dischargeable in bankruptcy, such as personal income taxes that are more than three years old. As a general rule, fiduciary taxes are not dischargeable. The Bankruptcy Code’s provisions relating to taxes are complex, and differ by chapter.

5. Student loans are nondischargeable. This is generally true, but with exceptions. If the debtor can prove certain hardship, student loans may be dischargeable. 

6. An individual can file for bankruptcy but not include certain creditors. Untrue, unlawful, and fraudulent. One principle behind the Bankruptcy Code is to treat similarly situated creditors equally. When a debtor does not list a creditor in bankruptcy and decides to pay back that creditor, that debtor is necessarily prejudicing the other creditors. When a debtor does this, the court considers this fraud, and the debtor risks losing the discharge and, in extreme circumstances, may face jail time and substantial fines.

7. Family members who loaned money to the debtor will lose out. Wrong. Although a debtor must list all creditors in the bankruptcy, in certain instances the debtor can repay certain creditors after the bankruptcy is filed. This is commonly known as a reaffirmation agreement. All reaffirmations are subject to court approval. Most debtors agree to pay back a debt they have no legal obligation to pay so as to maintain an existing business relationship. The court would probably approve the reaffirmation if the debtor lives with the creditor and may be forced to leave if he does not repay the debt.

8. Signing an agreement stating that a debt cannot be discharged in bankruptcy makes the debt nondischargeable. Wrong. Although there are extremely limited exceptions, these bankruptcy clauses are unenforceable and are a tactic used to scare debtors into not filing bankruptcy.

9. A person can lose his job if he files for bankruptcy. Wrong. The law states that if an individual can prove that an employer fired an employee solely because the employee filed for bankruptcy, the employee can sue the employer. If the debtor/employee looks for another job after filing for bankruptcy, however, a potential employer can use the bankruptcy filing as a factor (not the sole factor) in deciding whether to employ that individual. 

Laws very state to state so give us a call with your questions.  We will be glad to help.

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