Myths About Bankruptcy Dispelled

Bankruptcy was written into the constitution by our founding fathers to give each and every American the right to a second chance. However, though the bankruptcy code was created to help those who are down on their luck, bankruptcy has a bad reputation. Here are our responses to a few common bankruptcy myths contributing to the stigma of bankruptcy that make great, hardworking people hesitate to file out of fear or shame.

1. Filing bankruptcy means you’re bad with money, irresponsible, or a bad person

Bad things happen to good people- that’s a statement nobody can argue with. Many people fall into situations that spiral out of control or have nothing to do with them- very few people that file bankruptcy got into debt solely because they have a shopping problem.

Job loss. Student loans. Medical debt. These debts are more common reasons we see people in our offices- the hardworking father who was laid off from his job, a eager student who graduated and is having trouble finding a job in this economy, or the mother whose child got sick before the benefits from her new job kicked in.

Life happens. There is no way to account for every curveball life could throw at you. Bankruptcy is a process that allows people to get back on their feet, get a fresh start, and become more successful than ever before.

2. Bankruptcy will permanently ruin your credit.

This is absolutely a false statement. In fact, in many cases, bankruptcy can clear the slate and offer you a chance to rebuild your credit, offering you a sense of security as you move throughout life.

The way your FICO credit score (the credit score commonly used by lenders) is calculated is by using several aspects of your credit history. Each portion of the information that is used to arrive at that three-digit number is weighted according to importance. Newer credit history is weighted more heavily than old credit history- that way, even if you’ve been irresponsible with credit in the past, you will still be able to raise your credit score through beginning to use credit responsibly, creating a history of on-time payments.

Derogatory marks, such as bankruptcy, liens, civil judgments, and accounts in collection, is the category weighted the least in calculating your FICO score- only 10%. In addition, many negative accounts on your credit report will be wiped out by your bankruptcy, so they will no longer be used in calculating your credit score.

Bankruptcy will remain on your credit report for 10 years, after which point it will fall off. Many people are surprised at how quickly they’ll get credit card offers in the mail after bankruptcy- as soon as a month after discharge. We recommend getting a secured credit card (a credit card typically secured by a deposit at the bank) and start making regular, on-time payments to build your credit score. In approximately 6 months to a year, (assuming you’ve used the card responsibly) you’ll be able to get a regular credit card and get rid of the secured one.

3. You can’t afford to file for bankruptcy

False. Attorneys and law offices understand that you are struggling financially, and are often more than happy to help you set up a payment plan for your legal fees.

Our office offers flexible payment plans that you can set around your schedule. If your wages have been garnished over $600 in the six months before your case is filed, we will recover that money and can re-purpose it toward legal fees.

In addition to attorney fees, you’ll have to pay a filing fee to the court. In Michigan, the filing fee is $335 for a Chapter 7 bankruptcy and $310 for a Chapter 13 bankruptcy. When you think about all the debt you’ll be able to get rid of by filing bankruptcy, it really is a trivial price to pay to stop wage garnishments, eliminate credit
card debt, and get a the fresh start you deserve.

4. You’ll lose everything you own in bankruptcy

This is a common misconception. In bankruptcy, there are exemptions that will allow you to protect many of your assets from creditors. You can keep clothing and other personal property, and potentially even your home or car.

A Chapter 13 bankruptcy is known as a reorganization- it will allow you to keep your assets while paying off what you can reasonably afford over a 30 or 60-month period.

These myths perpetuate a skewed perception of bankruptcy. Bankruptcy is designed to help you back on your feet if you are in a financial situation you will not be able to escape on your own. It is not designed to take everything you have in order to repay your debts, shame you, or ruin your credit.

Bankruptcy is a chance for a fresh start, and every American is entitled to that chance.