Every parent who is worth their Dora the Explorer purchases knows that, sometimes, it’s necessary to bend the truth when dealing with their kids.
For example, while it would be ideal for kids to grasp that going to bed vs. staying up to watch TV is best for their health and long-term growth and development, a more pragmatic route typically involves conjuring up a monster of some sort who goes from house to house in search of kids who stay up past their bedtime. Is this lying? Yes. Does it work? Yes!
However, there are other myths that aren’t fundamentally ethical. Instead of pointing (okay, manipulating) people towards making smart choices that are best for them, these myths are designed to mislead and ultimately harm people. And in the grown-up world, there isn’t a better — or make that worse — example of this then when it comes to terrifying bankruptcy myths.
Here’s the thing: the fundamental purpose of bankruptcy law is not to punish debtors who can’t pay some, most, or maybe all of their bills. This isn’t the 1800s, and debtors’ prisons don’t exist anymore. Rather, the point of bankruptcy law is to provide debtors with legal protections so they can, eventually, restore their financial health. In other words, it’s not in society’s best interest for debtors to sink deeper and deeper in debt.
And so, if society doesn’t have it in for debtors, who or what is behind the scary bankruptcy myths that we’ll debunk in a moment? Why, creditors of course! They don’t want individuals and businesses that owe them money to file for bankruptcy, because once that happens creditors must immediately cease all communications and collection activity (e.g. lawsuits, wage garnishment, etc.).
What’s more — and far more egregiously to creditors — they must stand in line beside all other creditors and wait their turn to (in most cases) get a fraction of what they’re owed. Creditors hate that. They’d much rather intimidate and exhaust debtors into paying all or most of their overdue bill. In this respect, and quite strangely, the biggest threat for creditors doesn’t come from debtors. It comes from other creditors who also want a piece of the pie.
And so, now that you know that creditors are behind the horror story of bankruptcy, let’s look at three myths that many of them tell debtors, so they can get their money as quickly as possible and run away:
Myth: Very few people qualify for bankruptcy so you shouldn’t even bother.
Truth: Virtually anyone who passes their state’s respect means test can file for Chapter 7 bankruptcy protection. And if they do not pass the means test (because of a relatively higher income level), they can still almost certainly file for either Chapter 13 or Chapter 11 bankruptcy.
Myth: If you file for bankruptcy then you’ll lose everything.
Truth: Chapter 7, Chapter 11, and Chapter 13 all provide for exemptions that may allow debtors to keep assets, such as their primary residence, some personal items, and registered retirement funds. For Chapter 11 and Chapter 13 filings, debtors will be able to keep their car provided that they make timely payments during the reorganization plan.
Myth: Filing for bankruptcy will permanently destroy your credit score.
Truth: Filing for bankruptcy will result in a significant credit score hit (the exact amount depends on the credit score at the time of filing — the higher the initial credit score, the larger the hit). However, it will not permanently destroy your credit score. You can apply for secured credit cards immediately after discharge, and within a few months you’ll be eligible for conventional credit cards— albeit at a pricey interest rate. Provided that you make full payment (not just the interest!), then your credit score will start to rise, and within about a year or so after discharge you can apply for a conventional credit card. After a couple of years, you can apply for a conventional mortgage, and then you’re fully back in the game. Chances are your credit score within a few years of bankruptcy will be higher than before you files, because you’ll have much better earning, spending and saving habits.
To learn more about bankruptcy facts — and just as importantly to learn more about bankruptcy myths — then check out the blog at charleshuberlaw.com. There are hundreds of easy-to-read articles on everything from how to file for bankruptcy, to how to deal with aggressive creditors, and more. Simply put, it’s the blog that creditors don’t want you to read!