Bankruptcy Misconceptions- Separating Fact from Fiction
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1. Taxes cannot be discharged in bankruptcy- False
If you owe money for federal tax returns that are more than 3 years old, and were filed on time, they CAN be discharged in bankruptcy. Employment taxes cannot.
2. Student loans cannot be discharged in bankruptcy- Partially true
Most (80%) student loans are federally funded, and those cannot be discharged in bankruptcy unless there is a serious hardship. In late January 2013, several senators introduced 2 bills relating to this. These bills, if passed, would allow private student loans, from lenders like Wells Fargo, Chase, Etc. to be discharged in bankruptcy. Their reasoning is that private lenders charge much higher interest rates and fees, and it would be more beneficial to the Debtor.
3. A homeowner who files for bankruptcy will lose his/her house- False
If someone wants to keep their home, but is far behind on payments, a Chapter 13 would be their only option. A Chapter 13 bankruptcy sets up a payment plan, from 3-5 years that enables the Debtor to pay their arrearage while keeping their home. Many attorneys put people in Chapter 13 bankruptcies that do not belong there, because they make more money from a Chapter 13 case. In our firm, we have only 5 Chapter 13 cases, out of a hundred or so total bankruptcy cases. If a Debtor’s house is severely underwater, meaning they owe way more than what it is worth, we usually recommend that they let the house go- It does not make sense to continue to pay for a home they will never get a decent return on. In a Chapter 7 bankruptcy, if you are current on your mortgage payments, all you need to do is reaffirm your debt with the mortgage company, which consists of signing a document and filing with the court. If you do not choose to sign a reaffirmation agreement with your mortgage company, they are not required to report your payments to any credit bureaus, meaning you may not be able to refinance later on. If you have a lot of equity in your house, (more than $21,500 for a single, $43,000 for a couple), we won’t let you file. Not really a problem, nowadays!
4. My IRAs and 401K will be seized to pay off my creditors- False
Any IRAs or Roth IRAs, 401Ks, and pensions are all TOTALLY PROTECTED in a bankruptcy. They have to be listed in your bankruptcy petition, but they are assets that cannot be touched by the Bankruptcy Court. Whole life insurance and stock accounts are different- If there is any cash value, it can be taken to pay creditors. That is one of the reasons we recommend everyone have a trust, on the Estate Planning side of Elder Law Firm’s business. If you have kept your assets in a trust for a certain period of time, no matter what happens down the road, your assets are protected, because legally, your assets belong to the trust, not you, even though the trust may be for your benefit.
5. Someone who files for bankruptcy will never qualify for credit again- False
Yes, a bankruptcy will stay on your credit for 10 years, but it is not permanent, and creditors look at this differently than consumers. For people that already have poor credit, filing for bankruptcy is sometimes the best way to get good credit again, because after the discharge of a Chapter 7 case, the Debtor cannot receive another discharge (meaning they cannot file again for bankruptcy) for 8 years. So consider this- A credit card company gets 2 applications for 2 people. They are identical except that the second person filed for bankruptcy 3 months ago. Who should they extend credit to? The first person, who has never filed for bankruptcy, but could file any minute after maxing out their card? Or the second person, who filed for bankruptcy 3 months ago, recently received their discharge, which ensures their loan cannot be discharged under Chapter 7 for at least 8 more years? This is one of the main reasons people who have filed receive dozens of credit card offers right after discharge. And at Elder Law Firm, we don’t just file the bankruptcies, we sit and talk with each and every client about the importance of rebuilding their credit, and we show them how to do this. If you do it correctly, you should be able to buy a new house in 2-3 years with Fannie Mae, if they surrendered their old home in bankruptcy. We have clients to prove it!