Top Ten Myths in Bankruptcy
There are bankruptcy skeptics that tell people bankruptcy cannot help them. In certain situations this may be true, however, often bankruptcy can help you get rid of your debt and help you find your path to financial freedom. Our goal is to respond to those myths. Here are the top 10 bankruptcy myths.
BANKRUPTCY MYTH #10: I will lose my house if I file Chapter 7 bankruptcy.
It is extremely rare that a person loses the house they live in after filing Chapter 7 bankruptcy. However, there are two important factors that must be considered before filing Chapter 7 bankruptcy. First, are you current on your house payments? Second, how much equity do you have in your home? If you live in North Carolina, you are current on your house payments and you do not have excess equity in the house you live in (more than $35,000 if single or $70,000 if married and the house is deeded in both spouses’ names), you should be able to file Chapter 7 bankruptcy and keep the home you live in.
If you are current, or can become current, on your payments to your mortgage company or mortgage companies, home equity loans, city and county tax collector and homeowners association dues, you should be able to file Chapter 7 bankruptcy and keep your home. It is also important that you stay current on your house payments after filing your bankruptcy. If you are behind on your house payments, you may need to consider filing a Chapter 13 bankruptcy. Chapter 13 bankruptcy is specifically designed to help someone who is unable to bring their payments current before filing bankruptcy.
In North Carolina, you are entitled to protect/exempt $35,000 equity if single or $70,000 equity if married and the home is deeded in both spouses’ names. Remember, this only pertains to the house you currently live in, your residence. The equity in your home is determined by subtracting the amount you owe on all mortgages, equity lines, etc. from the value of your home. You can normally determine the value of your home from a recent appraisal, the tax value provided by the county tax office or a recent market analysis that compares your home to others in your neighborhood with adjustments for differences in square footage and other amenities. If you have more than $35,000 equity in your home or $70,000 if married and the home is deeded in both spouses’ names, you may want to consider a Chapter 13 bankruptcy. A chapter 13 is a partial repayment plan of your debts over a 3 to 5 year pay back plan. Even if you have too much equity on your home, you may only have to pay back pennies on the dollar of your other debts and still get to keep your house.
It is important that you are current, or can become current, on your house payments and you do not have excess equity in your home to file a Chapter 7 bankruptcy and keep your house.
BANKRUPTCY MYTH #9: I will lose my car or truck if I file Chapter 7 bankruptcy.
It is unlikely a person will lose their car after filing Chapter 7 bankruptcy. However there are two important factors that must be considered before filing Chapter 7 Bankruptcy. First, are you current on your car payments? Second, how much equity do you have in your car? If you are current, or can become current, on your car payments and you do not have excess equity in your car, you should be able to file Chapter 7 bankruptcy and keep your car. If you have multiple cars in your name, you should speak with a bankruptcy attorney to determine if all the cars can be protected.
Not only do you need to be current when you file bankruptcy, it is also important that you stay current on your car payments after filing your bankruptcy. If you are behind on your car payments and you cannot bring the car payments current before filing Chapter 7, you may need to consider a Chapter 13 bankruptcy. A Chapter 13 bankruptcy is designed to help someone who is behind on their payments and unable to bring the payments current in a short period of time.
In North Carolina, an individual is entitled to protect or exempt $3,500 equity in a single car or truck. Both the Western District of North Carolina bankruptcy court and Middle District of North Carolina bankruptcy court looks at the equity in a vehicle as the vehicle’s NADA Clean Retail value less the amount owed on the vehicle. If you have more than $3,500 equity in a car, it is still possible to keep the car. By using the car exemption and another exemption, sometimes known as the “wildcard” exemption, you may be able to protect up to $8,500 equity in a car.
As a reminder, you must be current on the vehicle and must not have excess equity in the car to file Chapter 7 bankruptcy and keep your car or truck.
BANKRUPTCY MYTH #8: I will lose my 401(k) or retirement plan.
In almost all cases you can keep your 401(k) if the retirement plan is an ERISA qualified plan. The Employee Retirement Income Security Act of 1974, or ERISA, plans have been determined to be protected or exempted according to North Carolina exemptions. As a result, you may want to consider bankruptcy before withdrawing money from your 401(k) or pension plan. IRAs are usually protected. Most other legitimate retirement plans are protected under the bankruptcy laws. It is very important that you check with an attorney at Duncan law to make sure that your retirement plan can be protected before you file a bankruptcy.
BANKRUPTCY MYTH #7: My credit will be ruined for the rest of my life if I file bankruptcy.
You should first consider the difference between your credit score and your ability to obtain credit. Your credit score is the number the credit reporting agencies assign to your credit. It is based on your history of making payments on your debts. Your ability to obtain credit is based on your ability to make payments in the future and looks at your income and your debts. If your debts exceed your ability to make payments, you may be unable to obtain credit even if you have consistently paid your debts on a timely basis. In other words, you may have a good credit score and not be able to purchase a car because you have too many debts. Filing bankruptcy will eliminate many of your debts and will improve your ability to obtain credit in the future. Many times, filing a bankruptcy will actually give you the opportunity to more quickly improve your credit score and your ability to obtain credit in the future. Many future creditors may look at your debts after you file a bankruptcy and determine that since these debts have been eliminated by the bankruptcy you are a better credit risk. Therefore, they are more likely to provide credit to you.
BANKRUPTCY MYTH #6: I will not be able to obtain credit for 10 years after bankruptcy.
Believe it or not, you may be able to obtain a car loan or a credit card almost immediately after being discharged from your bankruptcy. Since you have eliminated most of your debts in bankruptcy, many finance companies believe you now have the ability to make timely payments on a vehicle or credit card. However, you will most likely be charged a higher interest rate the first few years after your bankruptcy is discharged. If you make timely payments on the credit cards or loans obtained after filing bankruptcy, the interest rates and credit scores should improve quickly.
BANKRUPTCY MYTH #5: I will never be able to buy a house.
You will not qualify for a new home loan immediately after being discharged from Chapter 7 bankruptcy, but most clients have qualified in approximately one to two years after discharge. In those one to two years you will have time to reestablish your credit and hopefully save money for a down payment. Obviously, the financial climate at the time you attempt to purchase a new home will impact your ability to obtain a loan.
You may be able to finance a home immediately after filing a chapter 7 bankruptcy, the only problem is you will usually pay a higher interest rate immediately after filing the bankruptcy. However, many mortgage companies will not allow you to finance house until you are two years out of the bankruptcy process.
BANKRUPTCY MYTH #4: I will never be able to refinance or sell my house while in Chapter 13 bankruptcy.
When refinancing, the decision about whether you can obtain credit is up to the company refinancing your mortgage. Most companies are willing to consider refinancing after 12 months of continuous, on-time monthly payments to your mortgage company(ies) and Chapter 13 bankruptcy Trustee. It is important that you make payments to both on time. The company refinancing your mortgage will look at the payment history from the mortgage company(ies) and the Trustee. If you have an excellent payment history, you may receive preliminary approval for refinancing. Once a mortgage company provides preliminary approval, you will be required to obtain permission from the federal bankruptcy court before you can actually sign the papers to refinance your mortgage. If there are gaps in your payments to your current mortgage company(ies) or Chapter 13 Trustee, it is unlikely you will receive financing.
BANKRUPTCY MYTH #3: If married, my spouse and I must both file bankruptcy.
It is not necessary that both you and your spouse file bankruptcy to save a home or car that is financed in both names. When one spouse files bankruptcy on a joint debt, an automatic stay goes in place that keeps your creditors from foreclosing on your home or repossessing a car. However, you should seek legal advice for your specific case. Some joint debts, such as credit cards, personal loans, repossession, etc. would require both spouses to file bankruptcy to eliminate both persons’ debt. In addition, medical bills in North Carolina of one spouse are the responsibility of both spouses, so both spouses may be required to file to eliminate those debts.
BANKRUPTCY MYTH #2: If I make too much money and am above the “Means Test” I cannot file bankruptcy.
If you are above the Means Test based on your household income and family size, you may still qualify for bankruptcy. Depending on your future monthly expenses you may even qualify for Chapter 7 bankruptcy. If you are above the Means Test and do not qualify for a Chapter 7 bankruptcy, you may still qualify for a Chapter 13 bankruptcy. The Chapter 13 bankruptcy may eliminate a large percentage of your unsecured debts such as credit cards, personal loans, repossessions and medical bills.
BANKRUPTCY MYTH #1: Everyone will know I filed bankruptcy.
Unless you have a very public profile, it is extremely rare that anyone will ever know you filed bankruptcy. Although bankruptcy is a public legal proceeding, it is very unlikely that anyone will find out about your bankruptcy unless they run a credit check on you or have access to the bankruptcy court’s system. With the number of bankruptcy filings over the past few years, most publications, such as newspapers, do not list bankruptcy filings.
Those are our Top 10 Bankruptcy Myths. If you would like to speak with a bankruptcy attorney then please don’t hesitate to contact us. Contact us in ourCharlotte bankruptcy lawyers or our Greensboro bankruptcy lawyers now to set up a free evaluation so that we can answer any further questions that you may have and help you during this difficult time.
