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10 Bankruptcy Myths (#1-5)
In a pair of articles I will explore 10 common 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.
1.) Both spouses must file bankruptcy together.
Married couples are not required to file bankruptcy together. Whether it makes sense for just one spouse or for both spouses to file bankruptcy is a complicated question. When filing bankruptcy, the entire household picture (income, expenses and property) is considered whether both spouses file or not. You must list ALL of your AND your spouse’s belongings (personal property and real estate, with a few limited exceptions) regardless of whether the bankruptcy is a joint filing or an individual filing. Income must be disclosed for both spouses regardless of whether the bankruptcy is a joint filing or an individual filing.
It may make sense for just one spouse to file if, for example, all the debts are only in one spouse’s name. Sometimes married couples wonder if just one spouse can file so that the other spouse can maintain his or her credit score. If the couple has joint debts (for example they both applied for credit cards), the spouse that does not file bankruptcy will still be responsible for those debts. So no, both spouses are not required to both file for bankruptcy, but whether a joint filing or an individual filing makes sense for you is based on many factors that should be analyzed by a Houston bankruptcy attorney.
2.) I/we make too much money to file bankruptcy.
While it may be true that a person (or married couple) can have too high of an income to qualify for a Chapter 7 bankruptcy, there are very few people who aren’t eligible to file either a Chapter 7 bankruptcy, Chapter 13 bankruptcy OR a Chapter 11 bankruptcy.
One of the first steps a lawyer will take when performing a bankruptcy analysis for you is to consider your annual household income based on the previous 6 months. The household income is an average of all money coming into the home the last 6 months. This figure includes money from any and all sources, including wages, self-employment, rental income, pensions, child support, etc. (with a few exceptions, such as social security income and social security disability income). The average income is then compared to a number called the ‘median income’ for your household size. If your household income is under the median income, then you may be eligible to file a Chapter 7 bankruptcy. A list of the median income by state and family size can be found here:
If your household income is over the ‘median income,’ then an analysis commonly called the ‘Means Test’ will be completed, which takes into account both real and IRS standardized deductions. The outcome of the ‘Means Test’ can determine Chapter 7 bankruptcy or Chapter 13 bankruptcy filing eligibility (at lease income-wise).
In the context of a Chapter 7 bankruptcy, the ‘Means Test’ can determine if you are eligible to file a Chapter 7 bankruptcy. There is a common exception to the ‘Means Test’ – if at least half of your total debt was incurred running a business, you may be eligible to skip the ‘Means Test’ and you may qualify for a Chapter 7 bankruptcy regardless of your current income.
In the context of a Chapter 13 bankruptcy, the ‘Means Test’ can determine how many months your Chapter 13 bankruptcy plan must be and/or can determine the minimal amount of money you must pay back to your unsecured creditor(s).
There are ‘Means Test’ calculators online but they are no substitute for a local Houston bankruptcy attorney. Whether a person can or cannot claim a certain expense on the ‘Means Test’ or whether a person can or cannot override a standardized expense on the ‘Means Test’ depends on the bankruptcy laws and local case law interpreting those laws.
3.) Bankruptcy cannot help with a debt owed to the IRS.
Bankruptcy can indeed help with IRS debt. HOW bankruptcy can help depends on the type of IRS debt. Generally there are three types of IRS debt. The proper categorization of tax debt is a job for a bankruptcy attorney or tax attorney as there are many rules and exceptions. IRS debt categorization depends on when the specific year’s tax return was due, when the tax return was actually filed, when the tax was assessed and whether the IRS has filed a tax lien. More information can be found in this IRS publication:
Generally, the 3 types of tax debt are:
–Priority tax debt: This type of IRS debt is when there is a recently filed or unfiled tax return. Chapter 7 bankruptcy usually does not help with priority tax debt. During a Chapter 13 bankruptcy, priority tax debt will be repaid in full over a specified length of time through the Chapter 13 bankruptcy plan.
–Secured tax debt: This type of IRS debt is when the IRS has filed a tax lien against you. Like priority tax debt, Chapter 7 bankruptcy does not help with secured tax debt in most cases. Secured tax debt must usually be repaid in full through a Chapter 13 bankruptcy plan at an interest rate around 3%. In Texas, tax liens are recorded with the Secretary of State in the U.C.C. filings and/or in the county property records. If you are unsure if the IRS has filed a tax lien against you, contact the Secretary of State and the county, or we can help you.
–Unsecured tax debt: This type of IRS debt is usually older tax debt, when the return has been filed on time and there is no tax lien. This type of tax debt can be wiped out in both a Chapter 7 bankruptcy and in a Chapter 13 bankruptcy. To be certain that unsecured tax debt is wiped out in a Chapter 7 bankruptcy, an ‘Adversary Proceeding’ is needed. This is a lawsuit inside the bankruptcy against the IRS and ends with your bankruptcy judge determining if your tax debt can be discharged or not. During a Chapter 13 bankruptcy the IRS will file papers in your case showing how they believe your tax debt is classified.
4.) Everyone will know that I filed bankruptcy.
A bankruptcy filing is a public record but this does not mean everyone will know that you filed bankruptcy. Lists of people who filed bankruptcy in Houston are not regularly published in the newspaper or in other public media.
There are typically two ways that someone could find out about your bankruptcy filing. The first is if they see your credit report. A credit report will show that a Chapter 7 bankruptcy was filed for 10 years from the date of filing (7 years for a Chapter 13 filing). Anyone who has access to your credit report will know that you have filed bankruptcy.
The second way that someone could find out about your bankruptcy filing is through the court’s PACER system (an electronic database containing court filings). However, outside of lawyers, judges and other people in the legal profession, the general public can only view this information at the federal courthouse.
Even though a bankruptcy filing is a public record, it is unlikely that many people will know that you have filed bankruptcy.
5.)A Trustee will come to my home and go through my possessions when I file bankruptcy.
If you file Chapter 7 bankruptcy in Houston, you will be given the U.S. Trustee’s Bankruptcy Information Sheet. This document states that ‘A Trustee is appointed to take over your property.’ This refers to a legal concept and does not mean the Chapter 7 Trustee will literally come to your home and take all of your possessions. The U.S Trustee’s Bankruptcy Information Sheet can be found here:
For most consumer bankruptcies, whether a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, the Trustee believes that the paperwork filed accurately reflects the Debtor’s property and the property’s value. This is because all bankruptcy documents are signed and filed under the penalty of perjury.
In some cases, typically with real estate or financial accounts, the Trustee may request documentation, such as a property tax statement or a recent summary printout of your financial account.
A Trustee typically will not come to your house to audit possessions. This type of audit would only occur in extraordinary circumstances, such as if the Trustee has reason to believe the Debtor is misrepresenting the nature or value of their assets. Even though the Trustee has the right to have a representative review your assets, it is very unlikely this would happen in a typical consumer case.