Many people who are in financial trouble may be deterred from consulting with a bankruptcy attorney because of many prevailing misconceptions about the bankruptcy process itself, and the opportunities for rebuilding credit after a bankruptcy case is concluded. This is especially unfortunate for individuals who may have a very low credit score already, and are enduring a wage garnishment or running the risk of a foreclosure on their residence, or repossession of their automobile. Hopefully, this article will address many of those “myths” and encourage people who are in dire financial straits to meet with a bankruptcy attorney.
- Myth number one – “I will automatically lose my house and/or car.” Bankruptcy law allows debtors to exempt certain assets, including equity in residence, automobile, and retirement accounts. Many times these assets can be protected even if they are owned free and clear. Additionally, lenders will not seek to foreclose or repossess their collateral if the debtor is able to maintain the payments, as well as any applicable insurance. Because protecting homes and cars is a priority for bankruptcy clients, it is usually the first thing that a bankruptcy attorney will address during the consultation.
- Myth number two – “My bankruptcy filing will be in the newspaper, and everybody will know about it.” Unlike certain legal proceedings related to real estate, family law, and probate law, there is no requirement that bankruptcy filings be published in the newspaper. The only parties that are notified of the bankruptcy filing would be creditors and any co-debtors on debts listed in the bankruptcy petition.
- Myth number three – “My employer will be notified, and I could lose my job.” Employers are not automatically notified of a bankruptcy filing, unless they are a creditor for some reason. However, if a debtor is employed and files a Chapter 13 bankruptcy, they will probably be required to have the Chapter 13 payment deducted from their wages. But keep in mind that the Bankruptcy Code prevents an employer from firing an employee just because they filed a bankruptcy case.
- Myth number four – “I will never be able to obtain credit in the future if I file a bankruptcy case.” What many consumers overlook is that they are probably already a significant credit risk, with limited or nonexistent borrowing options. Delinquencies, defaults, lawsuits, judgments, garnishments, repossessions and foreclosures can do more damage to a credit score than a bankruptcy filing. And while the filing of a bankruptcy may appear on your credit report for up to 10 years, that does not mean that the discharged debtor will be prohibited from borrowing money. In fact, some debtors may actually see their credit score improve as a result of the bankruptcy filing, because their future wages will be protected, and they have reduced their debt – to – income ratio.
- Myth number five – “Only reckless and irresponsible people file for bankruptcy.” There are four common factors that lead to financial distress, and possibly a bankruptcy: 1) divorce/separation; 2) unemployment/underemployment; 3) health issues; and 4) overextension/mismanagement. Sometimes more than one factor will be present in a bankruptcy case. No matter how well you save and prepare, there is always the possibility that circumstances beyond your control will create a financial catastrophe. Entertainers, professional athletes, and politicians can wind up in Bankruptcy Court just as easily as someone who has a blue-collar job, or is on fixed income.
- Myth number six – “The change in bankruptcy laws made it harder for everybody to file a bankruptcy case.” While the Bankruptcy Amendments of 2005 placed additional requirements on individuals seeking bankruptcy relief, it did not create a huge barrier for individuals in financial distress. While a small group of individuals may be restricted in the bankruptcy relief available to them under the Bankruptcy Code, most of the 2005 law changes did not change the available bankruptcy options.
While everybody’s situation will be different, it would certainly make sense to meet with a bankruptcy attorney if you are facing a foreclosure, repossession or wage garnishment. Don’t be discouraged by these common misconceptions, and also take the opportunity during the consultation to address any of these issues as they apply to your unique situation. At Leiden & Leiden, we are always willing to address the concerns of potential clients, and make sure that they have all the information necessary to make an informed decision about the benefits of a bankruptcy filing. It never hurts to ask!