The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.
10 Bankruptcy Myths (#6-10)
In a pair of articles I will explore 10 common bankruptcy myths or misconceptions that those unfamiliar with bankruptcy may have about Chapter 7 bankruptcy or Chapter 13 bankruptcy. I hope you find these articles informative. While the articles are based on my knowledge of Chapter 7 bankruptcy in Houston and Chapter 13 bankruptcy in Houston, these myths can apply to bankruptcy in Texas in general.
6.) I will not have credit for 10 years after I file bankruptcy.
A Chapter 7 bankruptcy will remain on your credit report for 10 years from the date of filing. A Chapter 13 bankruptcy filing will remain on your credit report for 7 years from the date of filing. The record of a bankruptcy filing, however, is merely one of many factors that go into the credit score calculation.
Prior to filing a bankruptcy if you have debts reporting negative information each month (if you are late with your payments or don’t pay the minimum required, for example), the filing of the bankruptcy will stop the future reporting of negative information from these creditors. These items then begin to age and will naturally fall off of your credit report after 7 to 10 years. The more time that passes from the last reporting of the negative information, the more your credit score will heal to some extent.
After a successful bankruptcy it may be easier to get some kinds of credit than others. For example, it may be easier to get a small credit card than to get a mortgage. Car loans are also available from certain lenders, but you may have to pay a higher interest rate than someone with a higher credit score.
How a lender views your credit worthiness depends on the items on your credit report before bankruptcy, the items on your credit report after bankruptcy, and how much time has passed since your bankruptcy was discharged.
For more information on credit reporting and the FCRA (“Fair Credit Reporting Act”), this website may be helpful:
www.myfaircredit.com
7.) I will lose my home and/or my car if I file bankruptcy.
In most cases as long as you are current on your mortgage or car note, in a Chapter 7 bankruptcy you will not lose your home or your car. You will continue paying for your home or your car as you normally would if you had not filed Chapter 7 bankruptcy. As a part of this process, you will sign a reaffirmation agreement for your car loan. This is a ‘promise to pay’ agreement that puts you back on the hook for the loan, but it also prevents the auto lender from repossessing the car as long as you stay current on your payments.
In a Chapter 13 bankruptcy, you may be filing the bankruptcy to save your home or your car because you are behind on your payments. If this is the case, part of your Chapter 13 bankruptcy payment will be disbursed by the Chapter 13 Trustee to the mortgage company and/or car lender to catch you up on the mortgage and/or pay off the car during your Chapter 13 bankruptcy. If you are current on your mortgage and/or your car note when filing a Chapter 13 bankruptcy, you will not lose your home or your car as long as you maintain your monthly payments.
8.) I filed bankruptcy before so I cannot file bankruptcy again.
You can usually file a repeated bankruptcy, but whether you will receive a discharge of your debts depends on the type of the previous bankruptcy, the type of the bankruptcy you now wish to file and whether your previous bankruptcy was discharged (successfully completed), dismissed (the case was closed before a discharge), or the discharge was denied.
If your first bankruptcy was a Chapter 7 bankruptcy and the first case was discharged, you must wait 8 years before you can file another Chapter 7 bankruptcy. You must wait 4 years before you can file a Chapter 13 bankruptcy and received a discharge. In some cases it can make sense to file a Chapter 13 bankruptcy before the 4-year waiting period is up to save a car or home (even though you will not receive a discharge at the end of the case).
If your first bankruptcy was a Chapter 13 bankruptcy and the first case was discharged, you must wait 6 years before you can file a Chapter 7 bankruptcy. You must wait for 2 years before you can file another Chapter 13 bankruptcy and receive a discharge. Again, there may be situations where filing another Chapter 13 bankruptcy before the 2-year waiting period is up may make sense for you even if you are not entitled to receive a discharge.
If your first bankruptcy case was dismissed without prejudice (the order dismissing your case does not say something like ‘with prejudice’ or ‘prohibited from refiling for X days’)), there is not typically a waiting period. There are issues regarding the ‘Automatic Stay’ (the part of the bankruptcy law that protects debtors from collection activities) but that is outside the scope of this question. Cases are commonly dismissed with prejudice for reasons such as failure to file required bankruptcy documents or failure to file all necessary tax returns. Cases dismissed with prejudice will usually have an order stating a certain waiting period or required action that must be met before another bankruptcy case can be filed.
If the discharge was denied in the first case, the advice of an experienced Houston bankruptcy attorney is needed to know if you can file bankruptcy again.
9.) Filing bankruptcy means I am a bad person.
This is a very common misconception. The first thing that I want people to understand is that you are not alone. In 2014, over 619,000 Chapter 7 bankruptcies were filed and over 310,000 Chapter 13 bankruptcies were filed nationwide.
https://www.uscourts.gov/news/2015/01/28/bankruptcy-filings-drop-nearly-13-percent-calendar-year-2014
Many consumers that file bankruptcy do so due to unforeseen circumstances – job loss, illness, divorce, accident, etc. While some people are able to get back on their feet before payments to creditors are missed, other times this is more difficult and you may become behind on your payments. When payments are missed creditors such as credit cards can charge additional interest and fees and increase the interest rate, which can make balances quickly increase, making servicing the debt even harder for someone who is struggling financially.
As an example, if you have a $10,000 credit card balance with 28% interest, if you pay $250 per month it will take you almost 10 years to pay this balance off, and you will pay back over $29,000 for a $10,000 debt! You can take a look at the estimated time to payoff of your unsecured debts by using this calculator:
https://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx
Some consumers fight to pay off their debts – emptying their savings, cashing in retirement funds or even borrowing from friends and family. Consumers may be in a panic and feeling many conflicting emotions when taking these actions. Sending all of their money to creditors without a well thought out and tangible plan can result in consumers still having to file bankruptcy anyway after having lost their savings and/or retirement funds. While it is commendable to want to take this action, it can hurt your financial future.
Clients rarely want to meet with a bankruptcy lawyer, but often times that is the best way to get an independent assessment of your current financial situation and to become informed of your options to get a fresh start.
To help my bankruptcy clients realize they are not alone, I provide them with a copy of the book “They Went Broke!?” This book details the stories of rich and famous people that went through bankruptcy.
If you are a bankruptcy practitioner reading this article, I implore you to remember – your potential clients are probably stressed, scared and not sleeping well. Take the time to hear their story. Treat them with the dignity and respect they deserve. Give them the counseling they deserve in addition to your bankruptcy knowledge.
10.) I will not be able to get another job if I file bankruptcy.
In my over 5 years of practicing bankruptcy I have never had a client (or former client) tell me they were denied a job because of their bankruptcy filing. This does not mean employment denial due to a bankruptcy listed on the credit report never happens; it does mean it is unlikely. If you think about the jobs you have applied for, how many of them requested your permission to run a credit report as a part of the interview process?
Typically I believe that if a job is in a financial industry or financial position (think banking or accounting, for instance), there is some risk that a bankruptcy filing may prevent you from getting future employment in that industry.
Some industries (such as mortgage brokers) that have a licensing agency may pull credit reports as a part of the licensing or re-licensing process. In those situations, speaking to the licensing agency directly to learn how a bankruptcy on your credit report may affect your ability to get (or renew) a license may affect your decision whether to file a bankruptcy or try other debt relief methods.