There are many myths about bankruptcy you may hear floating among conversations by the misinformed. If you are faced with the decision of filing bankruptcy, make sure you are aware of the facts and don’t rely on what your uncle’s cousin’s friend once told you. For those who may be familiar with the concept (and TV Show), we will do some bankruptcy “Mythbusting” ourselves.
Myth 1: You can’t file bankruptcy if you have a job.
In order to qualify for a chapter 13 bankruptcy you must have income but not necessarily a “job”. Upfront, most cases will require you pay the filing fees, a small portion of attorney’s fees, and complete a required credit counseling course (don’t worry, you’re not graded on anything other than completion). After these initial costs are covered you will need to pay a monthly Trustee payment until you bankruptcy “repayment” plan is complete. If you lose your job or source of income the judge may grant a modification of your bankruptcy plan to assist you with your payments. You will end up paying the same amount throughout your plan, but your payments may decrease in the time of need and increase when you are able to make up the difference. The judge and Trustee want you to succeed in your bankruptcy and generally will assist to the fullest extent possible so long as you demonstrate an effort to fulfill your obligations.
Initial costs and other factors:
In addition to the upfront costs, your attorney will need paperwork to prepare your case. Typically you will need to provide at least the following: (i) your last two months pay advices, (ii) last four years tax returns and (iii) your last six months of bank statements.
Myth #2 Bankruptcy Makes You a Bad Citizen
When it comes to filing bankruptcy, medical bills tend to be a significant portion of debt included in many bankruptcy cases. In fact, Elizabeth Warren in Maxed Out (2006) noted that a significant number of middle class people are still forced into bankruptcy in spite of the fact that they have insurance coverage. In other words, many insured individuals are forced into bankruptcy because of medical bills. A remarkably high percentage of bankruptcy filers are working, tax-paying citizens.
Bankruptcy is a way to address a multitude of debts such as credit cards, mortgages, automobiles, tax liability, or child support. Generally speaking, a Chapter 13 bankruptcy will result in a small percentage of your unsecured creditors, such as medical bills, receiving a minimal payout. However, once you complete your bankruptcy, medical bills are discharged along with other unsecured debts. In a Chapter 7 bankruptcy your medical bills are discharged along with other unsecured debts and in many cases the unsecured creditors receive nothing.
Experience has shown that approximately half of those individuals who contact their health care provider seeking a reduction in their medical bills are successful in varying degrees. Bankruptcy is a serious matter and should be considered as a last resort. However, if medical bills are mounting and no end is in sight, bankruptcy may be the most effective means to address your mounting bills. Finally, timing your bankruptcy filing is also important. You want to maximize the result of your bankruptcy filing by including all your debts. If your condition is improving but additional bills are anticipated, you may want to wait to file. An experienced bankruptcy attorney will be able to advise you on the best time to file your case.
Myth # 3 Bankruptcy Ruins Your Credit
Filing bankruptcy will ruin my credit!!! This is not accurate. Filing bankruptcy is an opportunity for a fresh start and not the end of your financial life. The typical individual filing for bankruptcy relief already has poor credit or is headed that direction. From the long term perspective, filing for bankruptcy will eventually improve your credit by eliminating debt from your personal debt to income ratio. If you file bankruptcy, it may appear on your credit report for seven (chapter 13) to ten (chapter 7 or chapter 11) years. Even though the bankruptcy will appear on your credit report, this should not discourage you from filing if you are a distressed debtor. Bankruptcy is one of many factors a creditor considers in measuring risk for a loan. Basically, the creditor is compensated for accepting more risk by charging a higher interest rate.
Bankruptcy signals to a creditor that you have experienced financial hardship (usually related to death, medical issues, disability, or unemployment); however, bankruptcy is looked at as an act of responsibility. Creditors then turn to a “Johnny Come Lately” evaluation and look at what you have done since your bankruptcy filing to prove your financial responsibility. In fact, in a corollary tied into the creditor’s risk evaluation discussed above, after your bankruptcy is discharged you generally get inundated with offers for high interest credit cards and/or secured loans. If you choose to accept an offer, and responsibly use the extension of credit, you can begin rebuilding your credit and counteracting any negative effect of the bankruptcy filing.
The biggest advantage of a bankruptcy discharge is it releases the shackles of debt and frees up disposable income. As far as your credit score is concerned, increased disposable income is viewed favorably by lenders as there is an higher probability you will pay your debts moving forward. Bankruptcy is by no means is a golden ticket to good credit but responsibly using credit and actively budgeting on a monthly basis will lead you down the road to financial recovery.
On a final note, your credit score is typically used in limited situations: (i) purchasing a home, (ii) purchasing a vehicle, and (iii) employment evaluation for jobs that may be security intense (ex: Department of Homeland Security). If you have a home, car, and steady employment, you will be no worse off after filing for bankruptcy relief than before. The likelihood is you will be better off as you no longer have the debt monkey on your back and more of your hard earned dollars go into you pocket on a monthly basis.
Filing for bankruptcy can be a stressful and emotional period. The process can take a toll on your health, your relationships and your self-esteem. Schedule a free consultation with one of our experienced bankruptcy attorneys today by calling 713-869-9200, emailing firstname.lastname@example.org, or completing the form to the right. Baker & Associations will help you see the light at the end of the tunnel and provide you with a plan to help you through your difficult financial situation.
Written by Vanessa Denton.