Very often, bankruptcy is the next logical step in a person’s financial journey. However, misconceptions often surround bankruptcy with many people misunderstanding and, often, avoiding filing even when it makes sense for them to do so. Filing for bankruptcy does not always mean financial irresponsibility, and it is certainly nothing to be embarrassed about. In fact, studies show 62% of all personal bankruptcies actually arise from inability to pay medical bills, rather than consumer debt or mishandling of money. Here, we will show you some common myths surrounding bankruptcy and what actually happens during the complicated process.
Does Bankruptcy Really Discharge All Debts?
Almost everyone filing for bankruptcy intends on getting a “clean slate” or a fresh start. Often, people saddled with debt will file for bankruptcy, just to realize their largest debts are unable to be discharged. Typically, there are certain types of debts that are “non-dischargeable.” This means debts that a debtor will keep after their bankruptcy. The most common debts that will not be discharged are the following:
- Student Loan debts, unless you can prove a hardship;
- Domestic support obligations, such as alimony or child support;
- Debts arising from fraudulent actions.
While the most common debts, such as credit card debt and medical debt, can be discharged, a debtor will usually find themselves to be responsible for the above debts even after their bankruptcy.
Does Bankruptcy Really Ruin Your Credit?
A bankruptcy can stay on your credit for seven to ten years, but it begins to lose its effect on your credit score much sooner than that. A Chapter 7 Bankruptcy remains on your credit report for ten years following the initial filing. A Chapter 13, on the other hand, remains for seven years. But the fact that bankruptcy is reflected on a person’s credit reports does not mean that he or she will not be issued new credit during that time. A person’s credit profile will improve every month that passes so long as he or she is paying debts on time and taking measures to establish credit. In fact creditor will issue new credit cards just as soon as a chapter 7 case is closed, although the rate and terms will not be the same as it would be for someone with perfect credit. Typically, in about two years most people will have good credit if they took the right measures to get back on track.
Bankruptcy affects and is affected by the multiple elements of what constitutes your credit score. Bankruptcy relief allows you to restructure payment plans to pay off outstanding debts. Under a Chapter 7 Bankruptcy, a debtor may wipe out their unsecured debts. However, the more debts a debtor wipes out, the heavier the hit to your credit score.
Bankruptcy does not necessarily need to affect secured debt either, which also minimizes its affect on a person’s credit score. Collateral and liens, such as mortgages and car notes, may remain unaffected by declaring bankruptcy, depending on the circumstances. This gives a debtor an opportunity to catch up on other debts and pay off any secured debts. This would result in a positive on a debtor’s credit score.
Will I Lose All My Property If I File Bankruptcy?
Often, debtors are worried about what assets they may lose if they declare bankruptcy. While some assets will be at risk for sale to pay off creditors, certain property is exempt from this. For instance, in New Jersey, there is a blanket exemption for personal property as long as the value of the property stays below $1,000 for individuals and $2,000 for married couples.
Federal law allows an exemption of $27,900 for real estate used as a personal residence. This amount increases every three years based on the cost of living. This protects the equity a debtor may have in their real property. When determining whether your residence has equity above the exemptions that cannot be protected, the mortgage liens on the real property must be deducted along with a cost of sale and the exemption. If there is still equity remaining after these deductions are taken, then your real property has non-exempt equity and that amount is subject to sale by a trustee.
Through the proper use of the bankruptcy exemptions, you can keep all of your assets, erase debt and obtain a clean slate.
Can I Spend Recklessly Prior to Filing?
Often debtors will contemplate filing for bankruptcy after either making a large, reckless purchase, or decide to make such a purchase directly prior to filing. Being that credit card debt is dissolved in Chapter 7, many think that this would not be an issue. However, courts have repeatedly ruled that racking up charges ahead of bankruptcy filing is considered fraud. Further, as discussed above, debt incurred as a result of fraud is not discharged. Bankruptcy is not meant to be an opportunity for you to afford a debt free shopping spree.
Are All Bankruptcy Filers Financially Irresponsible?
While it may be easy to think of those filing for bankruptcy relief as irresponsible spenders, bankruptcies are not usually because of a personal failing. Often, a person’s reason for filing is completely out of their control. In fact, research shows that 66.5% of all bankruptcies were tied to medical issues – either because of high costs for care or time out of work. An estimated 530,000 families turn to bankruptcy relief because of medical issues and bills, according to research.
Very often, the only way for an individual to gain any form of relief is through bankruptcy. With increasing prices and inflation, the average person may have a difficult time making ends meet, especially when faced with a financial emergency.
Can I File For Bankruptcy More Than Once?
While it may be difficult to imagine wanting to repeat the bankruptcy process, sometimes life forces an individual to file again. Luckily for those people that require the help, it is not unheard of, nor even all that rare, to file for bankruptcy more than once in a lifetime. You can refile for Chapter 7 Bankruptcy every eight years, and Chapter 13 reorganizations can be filed at any time notwithstanding that a discharge may not be available immediately.
Due to the vast misconceptions and confusion surrounding the bankruptcy process, it is highly recommended that those who are seeking to file do not hesitate to get the involvement of an experienced bankruptcy attorney as soon as possible. If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and protect you from these common misconceptions. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
