Myths and misconceptions run rampant in our modern day. All too often, we hear things from trusted friends, colleagues, family members, or we read online. Some myths and misconceptions run deep and the best way to combat these pernicious falsities is to consult a qualified professional. On June 6, 2016, my esteemed mentor and former colleague, Attorney Wade Parker, wrote an article titled “Bankruptcy: Frequently Asked Questions Answered.” In that article, Attorney Parker answered questions about reluctance to file for bankruptcy protection, personal property exemptions that protect property when filing for bankruptcy, and credit scoring. I agree with Attorney Parker’s answers to those questions. My article seeks to expand on his advice and rebut the most pernicious myths and misconceptions that I hear from hard-working people who are considering filing for bankruptcy protection.
Myth No. 1: “I will never be able to get credit again.”
This is by far the most common myth I hear from folks who consult with me about filing for bankruptcy protection. I often ask where they heard that rumor and, unsurprisingly, many people tell me that they heard from a friend or family member. Others share that they read it online. I often guide these folks to ask themselves who has the most to gain from maintaining such a belief. Is it the government? Is it the bankruptcy courts? Is it debtors who sought bankruptcy protection? None of the above. It is creditors and lenders who have the most to gain by maintaining that rumor and discouraging otherwise honest folks from filing for bankruptcy protection. The most important light to shed on this myth is that bankruptcy is a right that Congress has provided for honest but unfortunate debtors who deserve a fresh start.
Another very important light I shine on this myth is the “frequent-filer” rules that Congress built into the Bankruptcy Code. In a nutshell, Congress sought to ensure that debtors do not unduly burden the bankruptcy courts or unfairly frustrate the rights of their creditors by filing successive bankruptcy cases. To combat this would-be problem, bankruptcy filers are required to wait a set period of time before filing again. The longest period is set at eight years. Lenders know that too. They know that if you filed a bankruptcy case today and discharged a debt owed to them, that you cannot file again for a set period of time. That, combined with a discharge of your other debts, gives lenders a lot of confidence to lend to a person who has filed for bankruptcy. You will get credit again.
Myth No. 2: “I will not be able to buy or sell a home or a car during or after filing for bankruptcy.”
This is another common myth that concerns would-be bankruptcy filers. I advise these folks in two lines of thinking. First, in Chapter 7, the bankruptcy process is quick and usually done in about three to four months from the point of filing. For those three to four months, you will not be able to sell or otherwise dispose of property you owned before you filed. After discharge, you are free to do so. My advice to potential Chapter 7 filers is to ensure that they have reliable transportation and housing before filing. Chapter 13 is different because the payment plan can last as long as five years. Rest assured, you may still dispose of property while you are in a Chapter 13 bankruptcy provided you meet the necessary requirements and obtain the proper approvals. We assist debtors who want to buy or sell their homes or vehicles very often and we strive make the process as smooth as possible for our clients.
Pragmatic realities weigh greatly in favor of bankruptcy debtors’ ability to achieve the fresh start that bankruptcy promises. Congress knows that. Bankruptcy courts know that. Bankruptcy attorneys and creditors know that. Rest assured, you will be able to buy, sell, or otherwise dispose of your property during and after your bankruptcy case is filed.
Myth No. 3: “I will have to pay taxes on the debts that I discharge in a bankruptcy.”
I most commonly hear this myth from folks who have worked with debt relief companies. As Attorney Parker wrote in his August 20, 2019 article “Don’t Be Fooled by Debt Relief Companies,” he discussed the tax liability created when debts are forgiven through debt relief programs. When they sign up with debt relief companies, many folks are unaware that they will be taxed as though the forgiven debts were income in their pocket. This is due to federal law – 26 U.S.C. §61(a) which defines “gross income.” Specifically, subsection (11) tells us “gross income means all income from whatever source derived, including (but not limited to) the following items: … Income from discharge of indebtedness.” Debts discharged at the will of the lender through negotiation and settlement are therefore considered taxable income. Debts discharged through a bankruptcy proceeding, however, are specifically excluded from gross income under 26 U.S.C. §108(a)(1)(A), which reads: “Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if…the discharge occurs in a title 11 case.” Bankruptcy is a proceeding under Title 11 of the United States Code and, therefore, any debts discharged as a result of a bankruptcy proceeding are not taxable income.
Myth No. 4: “I can report only certain property to protect other pieces of property.”
This is a very common myth for folks that want to seek the protection afforded by filing for bankruptcy but do not want to lose any of their property. The Bankruptcy Code requires full disclosure and absolute honesty from debtors. Therefore, you must report any and all property that you own at the time of filing. All is not lost, however. As Attorney Parker touched upon in his “Bankruptcy: Frequently Asked Questions Answered” article, the Bankruptcy Code offers very generous exemptions to allow debtors to protect property. I agree with his advice. I also note that debtors never have to lose property in a bankruptcy. If a debtor has property that they want to protect but the generous exemptions do not afford enough to protection, the debtor can keep the property through a Chapter 13 filing.
Myth No. 5: “I only want to file ‘against’ certain creditors.”
This myth is fairly common for folks seeking bankruptcy protection because they have been sued by a creditor and have other creditors with whom they enjoy a good relationship, such as mortgage or vehicle lenders. As I discussed in Myth #4, the Bankruptcy Code requires full and complete disclosure – including of all debts that you owe at the time of filing. Folks are often concerned that they will lose property or the lender for their home or vehicle will no longer do business with them. That is untrue. If you seek bankruptcy protection, you can and will maintain the relationships you have with mortgage and vehicle lenders and be able to keep the property while also curing any missed payments.
Sometimes, folks are also concerned about unsecured creditors, like credit cards and personal loans. Those accounts will almost certainly be closed and you will have to reapply for new credit with that lender. The most frequent concern here is about unsecured debts that are co-signed by or for a friend or family member and the debtor wants to protect the co-signed party. Bankruptcy also has ways to deal with this situation. For example, in a Chapter 13, we commonly assist debtors who co-signed unsecured debts for a friend or family member by creating a “special class” of unsecured creditor that can be treated uniquely. Rest assured, there are ways to deal with these situations.
This article has sought to debunk several of the most pernicious myths and misconceptions about seeking bankruptcy protection. My single best piece of advice is that when in doubt, consult with a qualified bankruptcy attorney. I think that you will find, as many of my clients do, that when properly handled and well advised, the vast majority of cases end with folks asking themselves why they waited so long to file for bankruptcy protection. They are very pleased with the results and their fresh start.
The experienced, proven, and trusted bankruptcy attorneys at Mooney Law stand ready to assist you and answer your questions. Consultations for bankruptcy are always free at Mooney Law. To schedule a FREE consultation, call us today at 717-200-HELP or 717-632-4656. You can also visit the firm website at https://www.mooney4law.com.
