The word “bankruptcy” often evokes feelings of shame and embarrassment, of acute discomfort, and of personal failure. But serious financial problems can easily overwhelm a person or a family, and sometimes bankruptcy is the best way to handle the situation. It can be a good option, and a positive step toward getting on with life. Its purpose has always been to give debtors stress relief and a fresh start.
I see clients with every imaginable debt problem in my practice. By the time they reach me, they are usually good candidates for bankruptcy. But they often resist it, fearing they will be labeled failures for the rest of their lives. I find that they often don’t understand what bankruptcy really means, and they have many misconceptions about the details - myths heard from friends, neighbors and self-appointed “experts.”
Here are a few of the many bits of misinformation I have heard:
I will never get credit again - Not true. After bankruptcy, many of your debts are gone, and creditors know that your income is no longer stretched beyond breaking the point. You are usually more creditworthy after a bankruptcy than before it, and are likely to receive many offers for credit cards and car loans.
I will lose everything I own - Not true. In most bankruptcies, you will keep your home, cars, furnishings, and retirement accounts. These are normally exempted from the bankruptcy, while your debts to other creditors are wiped away.
Everyone will know I filed for bankruptcy - False. There is almost no likelihood that anyone will even know that you filed, except for your creditors and the people you choose to tell. Although bankruptcy records are public, well over a million bankruptcies are filed each year. Unless someone is specifically looking for your records, it is unlikely anyone will stumble across any reference to your bankruptcy.
If I file for bankruptcy, all my tax records and bank accounts will be audited - Not at all. Of course, you must provide documentation of your financial situation. This means copies of your pay stubs and bank account statements for the past six months, and your most recently filed IRS tax return. These are not used for auditing your accounts, but simply to prove that you qualify for bankruptcy under the income, asset and expense guidelines.
Filing for bankruptcy won’t stop creditors from harassing me - Not true. As soon as you file a bankruptcy petition, the court issues an “automatic stay,” an order which prohibits all creditors from calling or contacting you in any way. Collections of debts are stopped. Garnishment of wages is stopped. Foreclosures and repossessions are delayed for several months. The bankruptcy trustee takes full control of all your creditors and determines whether they will get paid anything.
I must have a certain minimum amount of debt required to file bankruptcy - False. Bankruptcy may be filed by anyone with any amount of debt they can show they are unable to pay with current income. There is no minimum amount of debt, but the cost of filing bankruptcy (court filing fees, required debtor education courses and attorney fees) might make it foolish for someone with a very little debt to consider filing.
I only have to list the debts I want to get rid of in a bankruptcy petition - No, this is not the way it works. All debts must listed, so the bankruptcy trustee can assess your total debts against your total income and assets, to determine what you can actually afford to pay. If there are debts you want to continue to pay, you may reaffirm secured debts (such as a car loan), or voluntarily continue to repay such debts as loans from family members or bills from medical providers.
If I charge up some credit cards just before filing bankruptcy, I can get those debts discharged - Not likely. If you continue to rack up debt after you realize you can’t repay it, you may have to pay it back, even after you file bankruptcy.
I can’t get rid of back taxes in bankruptcy - False. Some federal, state and local income taxes can be wiped out in a bankruptcy. If you meet certain qualifications, it is possible to get many of these past due taxes discharged.
As you can see, bankruptcy is not a terrible thing, or anything shameful or demeaning. It will not ruin your life. If you are stressed to the max with debts, and your income just won’t stretch any farther, bankruptcy can be the best option, and a good plan for the future. A bit of magic offered by the federal government to get you back on your feet, and offer you a fresh start.
BYTAG
This article is part of an ongoing series of articles pertaining to legal issues relevant to the LGBT community, and is intended for general information purposes only – not legal advice. Christopher Heritage is an attorney in Palm Springs, and San Diego, CA, who focuses on LGBT estate planning, domestic partnerships, same-sex marriage, probate, trust administration, and bankruptcy. He welcomes questions and comments, and can be contacted at 760.325.2020, or by email: chris@heritagelegal.com