Bankruptcy Myths

In the wide-wide world of bankruptcy - myths abound.  Here are some of the most popular myths and the truth behind them.

1. I can get fired or not hired because of going bankrupt.

According to U.S. Bankruptcy Code you are not to be discriminated for employment “solely” based on whether or not you have filed for bankruptcy protection.  This means the employer must have more than just this reason for firing or not hiring.

2. My credit score will be damaged forever.

Although bankruptcy is the worst possible event that will destroy your credit score and stay on your credit report for up to 10 years its effects do not stay with you for the entire 10 years.  A solid financial plan to rebuild your credit can improve your scores enough to be eligible for good rate loans within a couple of years.

3. It will be in the newspaper.

Bankruptcy can be very embarrassing for many people.  However, there is no public bulletin board that is designed to call you out on your unfortunate circumstance.  It is public information and anyone that wishes to can go to the Bankruptcy Court and request your file.

4. I have to be broke to file for bankruptcy

You do not have to be broke or behind on your bills to qualify for bankruptcy.  Before you borrow money from friends and family that you are sure you won’t be able to pay back consult with an attorney and find out if bankruptcy may be a better option for you.  If you are trying to qualify for Chapter 7 you will need to pass a “means test”.  If you make too much money you may qualify for Chapter 13.

5. They can take my retirement money away from me

This is a really big deal and the answer is, generally not but, it depends and it’s kind of complicated so it really makes sense to speak with an attorney before filing for bankruptcy.  Where’s the money located?  That is the determining factor of whether or not your retirement account will be protected.

401K - Typically most employer-sponsored plans, including 401k’s, 403b’s, Keogh, Profit-Sharing plans, money purchase plans, defined- benefit plans are covered by the Employee Retirement Income Security Act, known as Erisa, and are protected from creditors.  This is not always true if the case of a former spouse or the I.R.S.

IRA  - Generally they are exempt as well however the guidelines can vary by state.  Again, please refer to an attorney for full considerations of your retirement accounts and bankruptcy.

Resources – Here are a few other articles that may offer more insight as to the ability of creditors to go after your retirement accounts.

Protecting Retirement Accounts from Creditors - NYTimes

What Happens to Your Retirement Plan in Bankruptcy? - NOLO

6.     I will lose my home

Maybe, maybe not.  If you are current on your mortgage then you can keep your home regardless if you file for Chapter 7 or 13.  If you are not current on your mortgage and you file for Chapter 7, the Bankruptcy Judge may not allow you to re-affirm that debt and you could lose the house.

Homestead exemption:  If you have equity in your property the Bankruptcy Judge may force you to liquidate the property to pay back some of your creditors.  However, there are Homestead exemptions that allow you to keep some or all of your equity.  This varies by state and you should consult with an attorney to see what is available to you.

7. All debt are discharged in bankruptcy

In Chapter 7 bankruptcy, debts are wiped out with the exception of certain taxes, child support/alimony and student loans.  Chapter 13 bankruptcy you may have to pay anywhere from 0% - 100% of your debt back over the course of 3 to 5 years.  What percentage you have to pay is based on your state guidelines and your discretionary income.

8. I can pick and choose what I want to include in the bankruptcy

Not true.  You must include all of your debts.  Failure to do this could result in additional costs and the possible dismissal of the bankruptcy case.

9. I can abuse the system and file whenever I want

Uh, no.  You cannot file for Chapter 7 within 8 years of filing the last one. You can file for Chapter 13 after 4 years of filing for Chapter 7 and 2 years after filing for a previous Chapter 13.  You cannot be in an active bankruptcy and file another one.

10. If I’m married and file for bankruptcy my husband/wife’s credit will be destroyed

If you have joint accounts then yes it will hurt both of your credit.  If one spouse files for bankruptcy and there are no joint accounts then the other spouse’s credit will remain unscathed.