I Heard that . . . Bankruptcy Myths. Or Another Examples of Why a Little Knowledge Can Be Dangerous. What You Don't Know about Bankruptcy But Thought You Did!
They say we live in the Information Age. Thus, many people know a little bit about bankruptcy (maybe from surfing on the web or Googling too much), or sometimes because they went through a case, or they knew someone who did. More often it’s because they heard from a friend who heard from a friend who said . . . You get the idea. Like most rumors, most of the information is either half-true, or just plain wrong, and some of it can be disastrously wrong. During my long career in bankruptcy court, I have compiled a list of some common misconceptions. Here are a few of them:
I Heard that . . .
How many times have I heard this one!
For most people, this is just wrong. Almost every year for the last decade, some 1.5 million people filed for bankruptcy in this country. That's just too many people – most of who have regular income and are back on their feet – for creditors looking to loan money to ignore.
Although your credit report may reflect a bankruptcy for 10 years, most people qualify for some loans as soon as their bankruptcy is completed. That is not to say that getting back into debt again fresh out of bankruptcy is a smart strategy.
Many lenders will charge higher interest rates so, as with many things in life, you will need to shop around for the best deal. Always check the APR on the loan agreement. However, historically, the waiting period after bankruptcy to qualify for conventional home loans is 2-3 years. In other words, many lenders will effectively ignore a bankruptcy if you otherwise qualify and have handled your remaining debts responsibly within a couple years after bankruptcy.
Indeed, many lenders now suggest bankruptcy to get rid of old debts in order to qualify for a new loan. By eliminating your old debts, your debt-to-income ratio will improve and it will be difficult to file bankruptcy again for certain periods. So they can count on your income being used to pay them – and that you may not be able to file a bankruptcy again for awhile, e.g., 8 years between Chapter 7 case filings.
The fact is most people go into bankruptcy with lousy credit. They'll be able to return to (and maybe surpass) their pre-bankruptcy FICO score more quickly than the rare debtor with pristine credit who needs to file bankruptcy after, say, a serious illness, which could mean a credit score drop of 100 points or more. Because 35 percent of one’s credit score is based on payment history, the further consumers get from any missed payments, the more their score improves. How to quicken the recovery? Establish new credit as soon as possible, either through a new credit card, maybe one of those secured cards, if they're still available, or car loan, though bankruptcy filers will have to pay higher interest rates.
So in reality, the greatest danger is actually getting too much new debt and wasting the fresh start given in a bankruptcy. Being careful about credit is simply more critical.
Remember my motto: Get out debt; stay out of debt.
A common belief about bankruptcy is that it will leave you with nothing, living out of a cardboard box.
This is just flat wrong. Bankruptcy is not about punishment. You're not a bad person because you had to file bankruptcy. Bankruptcy is meant to help you get a fresh start. It is not there to punish you for not paying your bills anymore (or for being a bad person).
Even homeowners who end up filing Chapter 7 often don't have enough equity in their home to benefit creditors, either because they've taken out a second mortgage, the home value has fallen or both. In such cases the trustee handling the bankruptcy can decide not to liquidate the home, in which case the debtor gets to keep it. Also, there is something called the homestead exemption, which in most circumstances allows you to keep your primary residence if your equity in it is below a certain threshold. In Georgia, the homestead exemption is $21,500; in South Carolina, it's $56,150. If the house is jointly owned, you can double these amounts; or, in Georgia, if you live in the house with your spouse, who can also exempt double the amount.
But since Chapter 7 dosen't stop foreclosure – although it tends to delay it for several months at least – those behind on their mortgage often can still lose their home regardless.
On the other hand, there are circumstances where is it possible to lose property in bankruptcy, but it does not happen automatically or to most people. There are precise rules concerning when and how this can happen. And for most people, going through bankruptcy usually means losing nothing at all.
Making sure you get through the case and keep what you need is what your lawyer does. This is the first and most important thing a lawyer does . . . making sure you aren't risking anything you are not willing to risk.