Common Myths About Bankruptcy
Bankruptcy is incredibly common in California and across the country, but the process is misunderstood by many people. There are too many myths floating around about the disadvantages–and even some perceived advantages–of filing for bankruptcy. Below, we dispel a few of the most common myths we’ve encountered about bankruptcy. For accurate and trusted advice concerning bankruptcy and other debt-relief options, talk to an experienced Ventura debt relief and bankruptcy attorney at Rounds & Sutter.
Myth: Bankruptcy Is for Financially Irresponsible People
The first myth to dispel, and perhaps the most important, is that bankruptcy is reserved for irresponsible people. It’s a black mark, to be avoided at all costs. This is simply not the case.
Bankruptcy is simply a legal tool used to get out from under crippling debt. It’s a tool like anything else, and it’s not reserved for any particular category of person. There were over 380,000 bankruptcy filings in 2022, down from over 413,000 in 2021. In 2019, there were over 777,000 bankruptcy filings.
The message is clear: Bankruptcy is entirely normal, it’s utilized by hundreds of thousands of Americans every year, and it might be right for you. This is why Congress has specifically enacted bankruptcy laws to help everyday people deal with their financial problems.
Myth: You Lose Your House if You File for Bankruptcy
People worry that bankruptcy will immediately lead to home foreclosure. On the contrary: Filing for bankruptcy puts an automatic stay on all collection proceedings, including home foreclosure. If you are filing under Chapter 13, you’ll be able to fold your mortgage arrears into your repayment plan and reduce your monthly obligation while becoming current on your mortgage. You might even be able to utilize a process known as “lien-stripping” to get rid of second and third mortgages.
If you file under Chapter 7, your mortgage will not be included in your discharge. However, filing does not trigger automatic foreclosure, and by eliminating your other debts, you’ll have much more disposable income to pay off your mortgage. California also includes an exemption up to a certain amount of home equity, so your home may be protected from collection and sale by the bankruptcy. If you’re current on your mortgage and you stay current, you should be able to avoid foreclosure.
Myth: You Lose Your Car and All Your Personal Belongings if You File for Bankruptcy
Depending upon which type of bankruptcy you’re pursuing, you might be called upon to sell some of your assets. If you file for Chapter 13 bankruptcy, you won’t have to sell any assets; the process simply does not call for any asset liquidation.
If you file for Chapter 7 bankruptcy, the trustee can seek to collect certain of your assets for sale in order to use the proceeds to pay off your debts. However, federal and state bankruptcy laws contain a number of exemptions, allowing you to protect many assets from sale. You can almost always protect your house, your car, and certain personal belongings from collection. With help from a seasoned bankruptcy lawyer, many debtors are able to protect most, if not all, of their cherished assets from liquidation.
Myth: Bankruptcy Destroys Your Credit Forever
Bankruptcy will affect your credit score; there’s no way around that. But the effect will not last forever. Depending on the type of bankruptcy you file for, the bankruptcy will disappear from your credit report entirely within seven or ten years. Even before that happens, you can build your credit score back up. You can start building credit as soon as you file for bankruptcy, in fact. If you are responsible with your finances, you’ll be able to get new credit, new loans, etc., even with the bankruptcy still on your credit report.
Myth: You Can Only File for Bankruptcy Once
You can’t file for bankruptcy every year, but you are certainly not limited to one bankruptcy in your lifetime. You can file for Chapter 7 bankruptcy every eight years, and you can file for Chapter 13 every two years from the date of your filing, so long as you are not in the midst of a reorganization. Switching from Chapter 7 to Chapter 13 or vice versa has different time limits. Whether you should file multiple times is a question for you to discuss with your bankruptcy lawyer and other financial advisors, but there’s no lifetime limit.
Myth: You Can Freely and Recklessly Spend a Bunch of Money Right Before Filing
Some people believe that bankruptcy grants them a blank check to rack up debt right before filing. This is a false, and dangerous, myth. Debts you incur right before filing might be excluded from your bankruptcy. Moreover, depending on the conduct, the court might even view it as fraud. We’d strongly advise against reckless spending on the eve of bankruptcy.
Find Financial Relief With Help From an Experienced Southern California Bankruptcy and Debt Relief Attorney
If you are dealing with heavy debt and considering debt relief options including bankruptcy, please contact Rounds & Sutter for a free, confidential consultation. With offices in Ventura and Westlake Village, we represent clients throughout Southern California, offering considered legal counsel in the face of life’s challenges.