There’s a lot of misinformation out there about debt, credit, and bankruptcy. Learn the facts about bankruptcy to help you sort out the truth from some common bankruptcy myths.
There’s a common belief that filing for bankruptcy means you failed. Your business tanked. You are a reckless spender. You can’t manage your money or stick to a budget. The myth says that if you have to file for bankruptcy, it’s your own fault.
In most cases, families that file for bankruptcy face problems outside their control. Three major causes of bankruptcy are unemployment, serious illness or medical issues, and divorce. With medical expenses on the rise and Michigan unemployment rates sitting at 7.5% (as of December 2020), many residents are considering bankruptcy through no fault of their own.
You and your spouse share expenses, incomes, even many debts (like your mortgage or a credit card). You work together to support your household, and struggle together to make ends meet. It may seem natural to assume you would share bankruptcy as well.
Spouses may file bankruptcy jointly to discharge shared debts, but they don’t have to. Whether one or both spouses should file for bankruptcy will depend on whose name is on the debts causing the problem. If your shared credit cards and consumer debt has gotten out of hand, then yes, a joint filing may be the right choice. However, if most of what you owe is medical debt, refinanced student loans, or individual credit cards, your household may be able to minimize the effect on your credit by only having one spouse file for bankruptcy.
A Chapter 13 bankruptcy may seem complicated, and you may assume it would be hard to file. Filling out the paperwork involved, gathering your asset and debt information, and completing the required credit counseling may all seem overwhelming.
In fact, qualifying for a Chapter 13 bankruptcy is relatively simple. The biggest question is whether you have enough disposable income to cover the payment plan. An experienced bankruptcy attorney can help you prepare the petition and payment plan based on your income and expenses. The harder part of a Chapter 13 bankruptcy is complying with the payment plan over the next 3 to 5 years.
Most self-represented bankruptcy filers do not get their payment plans confirmed. Even fewer complete the plan and have their remaining debt discharged. That’s why working with an attorney is important. Your lawyer can help you craft a payment plan the bankruptcy trustee will accept, and can advocate for you when life changes make sticking to the plan difficult or impossible.
Many people know that a Chapter 7 bankruptcy involves liquidating assets to satisfy creditors. You might worry the process will leave you destitute or homeless.
Most Chapter 7 bankruptcies are “no asset” cases. That means that everything that filer owns falls into an exemption and can’t be sold to pay creditors. You can use federal or state exemptions (you only get to pick one) to protect many common household assets, including houses, vehicles, retirement accounts, and personal items. You should talk to your bankruptcy attorney about which assets will be protected, and whether state or federal exemptions make more sense in your case.
Maybe the most popular bankruptcy myth is that it permanently destroys your credit. Many people do everything they can to avoid bankruptcy for fear that they will never be able to get another loan or that their credit will be permanently affected.
The strongest myths are based on a little truth stretched out of proportion. The true fact about bankruptcy is that it will lower your credit score by up to 200 points for 7 to 10 years after discharge. However, that is only one small part of a much bigger picture.
By the time most people file for bankruptcy, they have spent months or even years juggling debts, running up balances, making partial or late payments, and using one loan to pay off another. All of these actions also affect your credit score. Facts about bankruptcy reveal that by discharging unpaid consumer debts, putting a hold on new loans, and establishing a healthy payment history, many families actually come out of bankruptcy with a higher credit score than they went in.
Don’t let the myths get in your way. At John A. Steinberger & Associates, P.C., we are here to help you sort out the facts about bankruptcy to keep you making smart choices about your financial future. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We will help you review your credit options, exemptions, and budget choices to find the right solution for you. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.