If the truth will make you (debt) free, your creditors are motivated to lie about bankruptcy.
After all, if you think there is no palatable alternative to making payments to them forever, you’ll keep filling their pockets each month.
So, there’s no upside for a creditor in feeding you good information about bankruptcy.
After all, if you understood how bankruptcy could make your financial life manageable, you wouldn’t continue paying on debt you’ll never pay off.
Who lies about bankruptcy
Lying about bankruptcy law isn’t confined to creditors.
Debt settlement companies and debt management programs do it too: they foster fears about bankruptcy, because bankruptcy is, in truth, competition for them. And bankruptcy is usually cheaper and more effective for you than their product.
Why would they want to clear up misconceptions about becoming debt free?
Then there are the lazy lies: the personal finance writers who have a shallow understanding of bankruptcy, at best. They perpetuate bankruptcy myths, because if you could fix your problem yourself throught the courts, you wouldn’t read them.
A dose of truth about bankruptcy
Let’s look at five misconceptions about how bankruptcy works. See if you’ve accepted any of these distortions as true.
1. Bankruptcy keeps you from new credit for 10 years
Wrong. Neither law nor economics keep you from getting new credit after a bankruptcy discharge. The price of new credit may be higher right after bankruptcy, but is it generally available.
The supposed 10 year bar to credit may be a misunderstanding of the allowable reporting period for bankruptcy on a credit report. A bankruptcy on your credit record isn’t good, but then, an accurate report of your debts without bankruptcy probably isn’t pretty either.
My clients have financed cars and even houses while in Chapter 13. So, bankruptcy does not lock you out of the world of credit.
2. You lose everything you own in bankruptcy
Wrong. Every state, even the most conservative and judgmental about debt, provides for exemptions in their laws. Exemptions define the assets that are protected from creditors, and thus from a bankruptcy trustee. You keep exempt property without question.
Creditors would like you to think that a bankruptcy trustee will force the sale of everything you own, ignoring both law and economics. It’s economics that swell the stuff you keep beyond exemptions. Your stuff that isn’t exempt may have no sale value, or the cost of trying to sell it exceeds any possible return.
An experienced bankruptcy attorney can help you rearrange your holdings to maximize exemptions.
3. The bankruptcy system looks for reasons to throw you out
The internet swirls with fears that bankruptcy trustees will block your case for something about your pre-bankruptcy spending. Not so.
What kind of bankruptcy you are eligible for depends these days on the kind of debts you have and your disposable income under the means test.
Bankruptcy is provided for in the Constitution. Under current law, your bankruptcy discharge can only be denied for certain, specified actions that affected your creditors as a whole or that frustrated the operation of the bankruptcy system.
Denial of discharge is very rare and all the presumptions at law operate in favor of the individual debtor. There is no requirement that your pre-bankruptcy spending be smart or frugal or that it please the trustee. Discharge only requires that you make full disclosure of the situation.
4. Bankruptcy represents a moral failing
Creditors and others would like you to think that inability to pay your debts is a moral failing or a profound character flaw. There’s nothing like a little guilt to keep you paying.
The Bible charges creditors to forgive the debts of those who owe them money, routinely, every 7 years. Our Founders saw persistent debt as a drag on the economy and provided for bankruptcy as a remedy.
Statistically, most bankruptcy cases are driven by job loss, ill health, or divorce. Add unsuccessful business efforts to the list and you’ve accounted for the vast majority of bankruptcies. None of those reasons represents a character defect.
5. The kind of debt you have can no longer be discharged
Creditors spouted this lie a lot when the Bankruptcy Code was amended in 2005: some were quick to say that the kind of debt they were collecting was no longer dischargeable in bankruptcy.
In fact, the list of debts that can’t be discharged in bankruptcy is relatively short and essentially unchanged for more than 40 years. Credit card debt, medical debt, personal loans, auto accident claims can all be discharged in bankruptcy. Recent changes by the Biden administration even make it easier to discharge student loans, thought the fate of those programs is now in flux.
Choose good sources of information about law
Before you resign yourself to being in debt for the foreseeable future, get good information about your options to become debt free.
Read more on this site and our companion site Bankruptcy In Brief. The website for each bankruptcy court has a (dry) explanation of bankruptcy. NCLC’s bankruptcy chapter from Surviving Debt is online, and free.
Sit down for an assessment of your situation with an experienced bankruptcy lawyer. Know that a fresh start in bankruptcy is undoubtedly available to you.
