Over the past six years helping people deal with their creditors, I’ve heard people tell me a lot of different reasons for not wanting to file bankruptcy. A lot of them are based on outdated information, lies a creditor told them, or are “conventional wisdom” that is just plain wrong. Here are five of the most common myths about Chapter 7 and Chapter 13.
MYTH #1: I can’t file for bankruptcy because the laws changed and made it impossible.
TRUTH: In 2005, the federal government enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, which changed some of the rules and laws regarding consumer bankruptcy. It did make things slightly more difficult for the average consumer to file, in that they are now required to provide significantly more documentation (tax returns, paystubs, deeds, titles, et cetera) when they file.
MYTH #2: I make too much money to file for bankruptcy.
TRUTH: BAPCPA also requires Chapter 7 debtors to go through the “means test” . The means test is an income cap on Chapter 7 filings that is based on your household income – if your household has a higher gross income than the median household income for a family of the same number of people as yours in your state, you are very unlikely to be able to file a Chapter 7. (For more about the means test and a handy calculator to see how close you are, go here. However, even if you’re over the means test cap, you may still file for Chapter 13 protection- which is usually far better than doing nothing.
MYTH #3: I can’t file for bankruptcy because it will ruin my credit forever. This is probably the most common rationalization I hear for people not wanting to file for bankruptcy.
TRUTH: Bankruptcy is a very negative event to your FICO (credit) score. It affects everyone slightly differently depending on their current score, how many creditors they have on their credit report, and many other (smaller) factors. Realistically, filing for bankruptcy will have a very strong negative effect on your credit score, and the bankruptcy will continue to be listed on your credit report for 10 years (if you file Chapter 7) or 7 years (if you file Chapter 13). HOWEVER – the strongest negative impact to your credit will be felt in the year immediately after filing the bankruptcy, and the negative effect on your score will lessen greatly after that. In addition, building positive payment history after your filing (with a car payment, mortgage, or secured credit card) will help you rebuild your credit score quickly. For most people, bankruptcy can actually be a faster route to good credit than settling or consolidating your debts (which can have a negative effect on your score that lasts much longer than bankruptcy). Rebuilding your credit after a Chapter 7 filing to the mid-600s will take most people between two and three years.
MYTH #4: I can’t file for bankruptcy because I will lose my house/car/stuff.
TRUTH: There are limits on what you can keep in a bankruptcy as far as assets go. These limits are much more stringent in a Chapter 7, but can influence what you will have to pay in a Chapter 7 as well. In reality, about eighty percent of the people who come talk to me about bankruptcy have nothing they would lose in a Chapter 7 or a Chapter 13.
MYTH #5: I can’t file for bankruptcy because it’s for deadbeats.
TRUTH: This is frequently the biggest sticking point for people who don’t want to file for bankruptcy protection. The most common perception of people who file for bankruptcy, as held by people who haven’t actually had to do it, is of people who are in a financial mess that is entirely their own fault.
The reality is that people who file for bankruptcy are somewhat to blame for their financial situation,
but that outside factors almost always make things worse. Divorce, job loss, and medical bills are three of the most common factors leading to bankruptcy. The people who come in to see me are at the end of their rope, and most have tried everything to avoid filing for bankruptcy. They’ve suffered sleepless nights, borrowed money to pay bills, borrowed from their retirement, pawned necessary household items, and taken out title loans against the car they drive to work.
If you’re reading this blog, you’re probably in some kind of financial distress. Think about your own situation –is it entirely your fault? Come talk to me before it gets to that point. Take the necessary steps to get yourself a clean start and get your family back on the road to financial success.