Bankruptcy Myths

“Bankruptcy is on your record for 7 to 10 years”    Okay, this really isn’t a myth, but it is misleading. The truth is that everything is on “your record” (or credit report) for 7 to 10 years. When you pay something on time; when someone looks at your credit report, when you miss a monthly payment… if it’s posted once, it’s on there for the next 7 to 10 years. Does this mean that you are going to be a financial leper for the next 7 to 10 years? No.

The lending industry tends to focus on the last 24 months of a person’s credit history. It is very common for a person to have a good credit score and get a favorable mortgage about two years after having completed bankruptcy. For more, see Life After Bankruptcy.

“Under the new bankruptcy laws, you can no longer discharge credit card or medical debt” Not true at all. Credit card debt and medical debt are both unsecured debts, and unsecured debts are still dischargeable in both Chapter 7 and Chapter 13 bankruptcies.

“Under the new bankruptcy laws, you have to pay all your debt back.” Under the new bankruptcy laws there is now a formal test all persons filing bankruptcy must go through to determine whether they are allowed to file a Chapter 7 or Chapter 13 bankruptcy. The test takes into consideration the person’s income, expenses and family size. If, based on the test, someone finds that they are not allowed to file a Chapter 7 bankruptcy, then they may find themselves having to file a Chapter 13 and paying back a portion of their debt. Although Chapter 13 bankruptcy requires repayment of debt, it does not require 100% repayment in all circumstances. Commonly, Chapter 13 debtors repay about 5% to 20% of their debt.

To speak with an attorney about how your case was affected by the new bankruptcy laws please follow this link to our bankruptcy questionnaire.

“If you’re married, your spouse has to file bankruptcy with you.” Married couples are allowed to file bankruptcy together, but it is not mandatory. It’s very common to have one spouse file bankruptcy without the other. The only benefit of filing bankruptcy with your spouse is that you only have to pay one court filing fee and most attorneys will charge the same price as if only one spouse were to file (kind of like a “two-for-one”).

When married couple file bankruptcy together it’s referred to as a “joint case” but that’s about all that is “joint” in a bankruptcy case. At the heart of the bankruptcy system is the system’s analysis of a person’s income vs. their assets. This focus on a person’s income and their assets doesn’t change simply because they filed bankruptcy with their spouse.

“Bankruptcy kills debt…wipes it out completely.” There are two reasons why this statement is a myth. First, it implies that all debt can be discharged in a bankruptcy. Not all debt is dischargeable (e.g., debts stemming from fraudulent acts, certain taxes, child support obligations). Secondly, just because a debt is listed in a person’s bankruptcy documents doesn’t mean the debt is void. Rather, when someone discharges debt in a bankruptcy they insulate themselves from it.

The fact that bankruptcy works to insulate a person from their debt rather than kill or “wipe the debt out” is an important difference - particularly when there is joint debt. For example, assume you and your mother are jointly responsible on a credit card debt or a car loan. Also, assume you file bankruptcy and your mother does not. When the bankruptcy is over and the debts are discharged, the effect will be to insulate you from your debt. Your mother remains liable for the debt.