BANKRUPTCY MYTHBUSTERS WHAT IS CONSUMER BANKRUPTCY The Bankruptcy

BANKRUPTCY MYTHBUSTERS

WHAT IS CONSUMER BANKRUPTCY? • The Bankruptcy Code defines “consumer debt” as debt incurred by an individual primarily for a personal, family, or household purpose. 11 U. S. C. § 101(8). • Not business debt. • Can be chapter 7, 11, 12, or 13 • Chapter 15 is available to individuals but a case under this chapter is not usually referred to as a “consumer case. ”

TOP 10 BANKRUPTCY MYTHS 1. Bankruptcy ruins your credit and prevents you from getting a car loan, mortgage loan, credit card, etc. for up to 10 years. 2. People can file for bankruptcy as many times as they want. 3. Free House! (i. e. You don’t have to pay for your house (or car in bankruptcy. ) 4. You lose all your stuff: the reverse of the Free House myth. 5. The discharge gets you out of all debt. 6. You can choose what debts and what assets are in bankruptcy. 7. You should buy lots of expensive things and take vacation right before you file since it will all be discharged anyway. 8. Bankruptcy fixes your debt problems.

THE “DEBTORS ARE DEADBEATS” MYTH • Medical debt, job loss, family emergencies all can lead to financial problems. • Couple who owned a car dealership had a son badly burned in a house fire, which led to major financial problems for them and their business. • Woman who quit job to take care of mother with Alzheimer's. • Cancer diagnosis for debtor or family member. • Small business fails and debtor personally guarantees loans.

• • Successful people have filed bankruptcy, including Henry Ford, Walt Disney, Donald Trump, Burt Reynolds, 50 Cent Anna Nicole Smith.

THE “BANKRUPTCY IS BAD FOR BUSINESS AND THE ECONOMY” MYTH • “Capitalism without bankruptcy is like Christianity without hell. ” This is a quote from Frank Borman, former astronaut and Chairman of Eastern Airlines. • America’s culture and economy teaches us to take risks and in fact, depends on risk takers to be “job creators. ” • Without consumer bankruptcy, individuals would be saddled with debt for life, be unable to acquire more credit/debt, and, therefore, be unable to participate in the market.

THE “BANKRUPTCY RUINS YOUR CREDIT” MYTH • Bankruptcy does leave a blemish on your credit report. • But ability to access credit actually increases for many people after they receive a bankruptcy discharge (albeit at a higher rate of interest). • This is because a debtor cannot receive another discharge for several years—amount of time varies by chapter you were in and chapter you file in the future. • Debtors routinely receive applications for credit cards and approval for car loans while they are in bankruptcy.

THE “REPEAT FILER” MYTH • Debtors can file repeatedly…but there are consequences for doing so. • Cannot receive two discharges within a certain time frame. For example, a debtor cannot receive a discharge under chapter 7 for 8 years after receiving one in a chapter 7. This varies by chapter. • Individual debtors who file within a year of a pending bankruptcy do not receive the full benefit of the stay. 30 day stay for one pending case within a year and no stay for more than one. • The stay can be extended by motion.

THE “FREE HOUSE” MYTH • Many people think that you can get out of paying for your house or car, etc. , by filing bankruptcy. • This is simply not true for several reasons: • Bankruptcy gets rid of contractual obligation (personal liability) on secured debts but does not remove a lien. • You must maintain post-petition payments on mortgage in order to prevent a foreclosure of the home. Bankruptcy removes personal liability for the loan. • In a chapter 13, you must repay pre-petition arrears over 3 -5 years through plan. • In a chapter 7, trustee can sell the home/car if there is equity above the state or federal exemption.

THE “LOSE YOUR STUFF” MYTH • Reverse of the “Free House” myth. • There are state and federal exemptions that prevent the trustee from taking everything from you. • In a Chapter 13 case you “pay to play. ” Keep assets with equity by paying all disposable income for 3 -5 years to creditors. • However, in a chapter 7 case, the trustee can sell assets if they have value above the exemption. Once sold, trustee will pay to the debtor the amount of the claimed exemption. • For example, a house (valued at $200, 000) can be sold by the trustee if there is equity (no mortgage) but Debtor will be paid from proceeds of that sale in the amount of exemption, which varies by county($125, 000 in Ulster County). Estate will retain $75, 000 for unsecured creditors. If there is a $50, 000 mortgage, estate will retain only $25, 000 for creditors, etc.

THE “YOU DON’T HAVE TO PAY BACK DEBTS” MYTH • A discharge only gets you out of some debts—such as credit card debt. • The law defines certain debts as non-dischargeable, such as debt procured by fraud, support obligations, certain tax obligations, student loans, drunk driving civil judgments. Of course, there are exceptions. You should consult with a bankruptcy attorney about your specific debt. • The law also prevents certain “bad debtors” from obtaining a discharge of any debts if the debtor falsified documents in filing or committed other frauds in filing.

“CHOOSING WHAT DEBTS AND WHAT ASSETS ARE IN BANKRUPTCY” MYTH • So many debtors come to court and tell the Judge that a certain debt or asset was “not supposed to be part of the bankruptcy”---usually debts they like, such as mortgages on a vacation home or a car loan. • Debtors should know that ALL pre-petition debts and ALL assets are potentially affected by a bankruptcy filing.

THE “SPEND A LOT BEFORE FILING” MYTH • Unfortunately, Congress is ahead of you on that one. • Under the bankruptcy code, debt for “luxury goods or services” over a statutory amount within 90 days of filing are presumed to be nondischargeable.

THE “BANKRUPTCY FIXES YOUR DEBT PROBLEMS” MYTH • Bankruptcy is sometimes referred to as a “fresh start, ” which is true as well as misleading. • Bankruptcy gets rid of debt you currently have but it cannot help you plan for the future. • You have to develop and stick to a sustainable budget and make sure that you do not spend more than you make so that you do not wind up back in financial distress.