Last updated August 22, 2018.
Like most areas of the law, bankruptcy in the United States is a complex and often confusing topic. The U.S. Bankruptcy Code, which governs bankruptcy cases throughout the country, comes to more than 500 pages in the official U.S. Code. And that’s just the beginning of the law’s complexity. Some aspects of federal bankruptcy law (like bankruptcy exemptions) actually let each state come up with its own rules.
As a result, bankruptcy lawyers can spend their entire careers learning the ins and outs of bankruptcy law in the U.S., and still have more to learn.
So, it’s no surprise that there are some strange myths concerning bankruptcy. Many of these myths are told by well-meaning, but uninformed, financial “experts.” But, well-intentioned or not, those myths pose serious legal and financial risks for any Americans who accept them. To help you avoid those risks, we’ve compiled this list of 12 common bankruptcy myths that we’ve run into in our Las Vegas practice, and what the reality is for each.
Myth 1: You don’t have enough debt to file bankruptcy
There is no minimum debt threshold required to file for bankruptcy. You can file with any amount of debt, although how much debt you have influences what chapter you file under.
Myth 2: If you have a job, you can’t file bankruptcy
In reality, it depends on the job–or, more to the point, your income. Chapter 13 bankruptcy is called a “wage earner’s” bankruptcy, and the debtor must have an income stream to qualify. Many families with multiple incomes are eligible to file bankruptcy. But you can qualify for a Chapter 7 “liquidating” bankruptcy even if you’re making money. The important questions are how much you make and whether that’s enough to pay down your debts.
Myth 3: You can lose your job if you file bankruptcy
Federal law prohibits a government or private employer from terminating or discriminating against an employee who files bankruptcy. In other words, it is illegal for your employer to fire you because you filed bankruptcy.
Myth 4: If you file for bankruptcy, the bank may come to foreclose on your home or repossess your car (or other property)
Not true: The automatic stay stops any foreclosure or repossession. If the creditor wants to continue its collection activities, including foreclosure or repossession, it has to petition the bankruptcy court for permission to do so.
Myth 5: You lose everything in a Chapter 7 bankruptcy
Actually, only four percent of all Chapter 7 cases are “asset cases”–cases where the debtor has non-exempt assets that the trustee sells to pay off his or her creditors. In the remaining 96% the debtor loses nothing. Plus, if you have property secured by a debt–like a car payment or home mortgage–you can reaffirm your obligation, keep that property, and continue paying the debt.
Myth 6: You will lose your retirement account if you file bankruptcy
Nope. Retirement accounts are actually well-protected by the bankruptcy laws. Creditors can’t touch them–or any payments you receive from them after you retire. This is one of the big reasons why it’s usually a bad idea to take money out of your retirement account to pay off a debt.
Myth 7: You can file a “medical bankruptcy” to deal with medical debt exclusively
Although medical expenses can lead to bankruptcy, federal law requires the debtor to include all debts in a bankruptcy case, including auto loans, mortgages, and credit cards. A “medical bankruptcy,” when the debtor only discharges medical debt, is a myth.
The bankruptcy laws do not allow the debtor to pick and choose which debts are included and which are excluded. Debts are treated fairly and equally in bankruptcy, and the debt classes are structured to avoid preferential treatment of one creditor over another within the same class.
Myth 8: The trustee will physically search your home to find out what you own
Thankfully, no. Or at least, very probably not: A trustee would need a court order to search your house, and courts don’t hand those out readily.
In fact, the few cases in which trustees were permitted to search the debtor’s house contain pretty extreme facts. For example, in one case, it was clear from the debtor’s divorce court records that she was concealing major assets in her bankruptcy. The bankruptcy court allowed the trustee to search her home, where he found 189 pieces of fine jewelry and 10 pieces of artwork. These items were then appraised for almost a quarter of a million dollars!
Myth 9: Taxes cannot be discharged in bankruptcy
This myth is based in some truth. Tax debt is especially hard to discharge, and in some cases the debtor may not discharge tax debt. The truth is that discharging tax debt often depends on how long you have had the tax debt and what has happened in the meantime. It is important to speak with an experienced bankruptcy attorney about your circumstances and get competent legal advice.
Myth 10: Bankruptcy ruins your credit score
In practice, bankruptcy is typically a debtor’s last resort, meaning that the average bankruptcy filer’s credit is already severely damaged. But bankruptcy wipes the slate clean and stops future adverse reporting for past debts. Ultimately, filing for bankruptcy can often help you obtain a fresh start.
Myth 11: You can’t get credit after a bankruptcy
A bankruptcy discharges unsecured debt and reorganizes your finances. Bankruptcy can make it easier for you to pay your bills. Many debtors are able to purchase cars and obtain credit within months after the bankruptcy discharge. Many others are able to buy a home two years after the discharge.
Myth 12: You can only file bankruptcy once
While the Bankruptcy Code attempts to prevent multiple and abusive filings, bankruptcy is always available to those who need it. There are time restrictions that may prevent a second discharge, for instance, an individual debtor who received a chapter 7 bankruptcy discharge to file another Chapter 7 after eight years. However, that debtor is eligible for a Chapter 13 after four years.
Don’t fall for these Las Vegas bankruptcy myths!
Don’t be misled by bankruptcy myths. Get the facts from an experienced Las Vegas bankruptcy attorney from Freedom Law Firm and ensure the law is working for you. Call 702-745-8327 to schedule a free appointment.