Bankruptcy Myths Your Creditors Want You to Believe


Myth: Debtors who file a Bankruptcy Petition Lose Everything.

This myth is often used to discourage debtors from filing a Bankruptcy Petition. In fact, the exact opposite is often true. Below are two of the many examples of how filing a bankruptcy petition can be used to protect a debtor’s property:

Example:   Due to the loss of employment or a substantial reduction of income, a debtor residing in New Jersey is unable to pay credit card debt of $40,000.00, and files a Chapter 7 Bankruptcy Petition. The debtor and the debtor’s spouse own a home valued at $300,000.00. The balance on the mortgage on the home is $240,000.00. Assuming the debtor does not own any other real property or personal property of significant value such as stocks, bonds or substantial bank accounts, the debtor will be able to discharge credit card debt and retain ownership of the residence.

Example:   Due to a prolonged illness, a debtor residing in New Jersey who has no medical insurance has incurred $50,00.00 in medical bills. All of the debtor’s saving have been exhausted and the debtor has been unable to make mortgage payments for many months and is now threatened with foreclosure. The debtor has now returned to work and can begin making current mortgage payments, but has no means to pay the medical bill or the mortgage arrears. The debtor files a Chapter 13 Bankruptcy Petition and Plan which provides for repayment of the mortgage arrears over 60 months and payment of ten percent of the medical bills over the same period.

Myth:  Debtors Who File Bankruptcy Can Never Get Credit Again.

This is a difficult myth to debunk because the myth appeals to our common sense. However, it has been our experience that many of those on whose behalf we filed bankruptcy have been able to reestablish their credit, obtain credit cards and purchase vehicles and homes. In fact, filing a bankruptcy may help debtors reestablish their credit.

“ … [Y]our credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as “Included in Chapter 7 Bankruptcy” or “Included in Chapter 13 Wage Earner Plan,” John Ulzheimer, President of Educational Services.

Example:  Chapter 7 Personal Bankruptcy discharges most debt and gives a debtor a clean slate and fresh start. This will enable timely payment current obligations by the debtor and the creation of a new credit history.

Example:  A Chapter 13 Bankruptcy Plan allows a homeowner to avoid foreclosure by making the current mortgage payments as they become due and paying the arrears through the Chapter 13 Plan. It has been our experience that timely payment of the mortgage and arrears have provided a basis for the extension to debtors of new credit.

Myth:  I make too much money to file bankruptcy?

Many of our clients have done their homework and know that the bankruptcy laws changed significantly in 2005 and believe that the changes no longer give them a chance to claim bankruptcy to address mounting debt issues.   This is based on their understanding – or misunderstanding – of what is known as the “Means Test”.   The Means Test in Chapter 7 Bankruptcy is a calculation of a debtor’s household income against the median income in their state for their family size.

However, many of our Chapter 7 clients since 2005 have qualified for bankruptcy despite having incomes that are significantly higher than the median income.   The Means Test is a complicated analysis of a debtor’s financial circumstances and should only be done with the assistances of an experienced bankruptcy attorney.

CAUTION: It must to be strongly emphasized that bankruptcy is not like vitamins – It is not good for everyone and not a miracle cure even for those who will benefit from the protection of the Bankruptcy Laws. Therefore a decision about whether it is in the interest of a debtor to seek bankruptcy protection and the type of bankruptcy to be filed should be made only after consultation with a bankruptcy lawyer.