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Bankruptcy Myth 1 – The new bankruptcy law has eliminated bankruptcy as an option for most people.
Truth – The median income/means test, which is the most significant change in the law, actually disqualifies relatively few persons who would have previously been able to file under Chapter 7.
Bankruptcy Myth 2 – If I am unable to file Chapter 7 bankruptcy because I am disqualified by the means test, I am at the mercy of my creditors.
Truth – Chapter 13 may achieve a very substantial reduction of your debt and is often an excellent alternative when Chapter 7 is not an option.
Bankruptcy Myth 3 If I have a level of income that would cause me to fail the means test, I will not be able to file a Chapter 7 case under any circumstances
Truth – The means test only applies when more of your debt is consumer than non-consumer. Examples of consumer debt include credit cards, medical bills, home mortgages (personal residence), etc.. Examples of non-consumer debt include debts owed to vendors or suppliers of your business, mortgages on investment real estate, etc. As an example, a high income person, who would otherwise be disqualified under the means test, may be able to file Chapter 7 to avoid deficiencies on failed real estate investments if the mortgage amounts exceeded the total of his consumer debt.
Bankruptcy Myth 4 – The required appearance in a typical Chapter 7 bankruptcy case is a court proceeding similar to what you might see on television.
Truth – The appearance occurs in a hearing room rather than a court room and is presided over by a trustee, not a judge. Bankruptcy trustee’s are local professionals, i.e. cpa’s, attorney’s, etc. who contract with the United States Trustee’s Office to evaluate bankruptcy cases. If the bankruptcy schedules have been prepared well and are supplemented with other documentation that the trustee will need to evaluate the case, the meeting is usually brief.
Bankruptcy Myth 5 – If I only have one vehicle, it is protected because I have to get to work, transport my aunt to her weekly dialysis, etc.
Truth – Bankruptcy is basically an impersonal process that applies the law with little regard for individual circumstances. There is no “necessity exemption” for a vehicle. If the vehicle’s value exceeds your available exemptions and you are either unable or unwilling to pay this difference to the trustee, you will lose the vehicle.
Bankruptcy Myth 6 – If I borrow money from my friend and promise to repay her when I receive my tax refund the trustee can’t take it because I owe it to my friend.
Truth – If you have not actually received and used your tax refund at the time your case is filed, unless it is exempt for some other reason, the trustee will seize it for the benefit of your creditors and you will lose the refund (and perhaps your friend as well!)
Bankruptcy Myth 7 – My name is on the deed to my parent’s home as part of their estate plan. That has nothing to do with my bankruptcy.
Truth – Your bankruptcy trustee is only concerned with record ownership of assets. Your parent’s home would be at risk of being sold to satisfy your creditors. The result would be the same if your name were placed on the title of a vehicle driven by a younger family member for insurance purposes. If your name appears on the title, the vehicle is yours, even if you’ve never been behind the wheel!
Bankruptcy Myth 8 – If I am deeply in debt and struggling financially due to delinquent credit cards, I might as well liquidate my retirement accounts because the company’s would eventually sue me and I’d lose them anyway.
Truth – It is certainly understandable to feel a strong moral obligation to repay ones debts. However, you should be aware that retirement accounts such as 401 (K); 403 (b); IRA, etc. are exempt from creditors other than the Internal Revenue Service. These accounts are protected from creditors because legislators recognize that a person experiencing financial hardship should not be expected to mortgage his entire future in order to repay his debt. Sadly, I have often seen clients completely liquidate their retirement accounts before eventually being forced into bankruptcy anyway.
Bankruptcy Myth 9 – If I receive something as a gift, I am not required to list it as an asset in my bankruptcy schedules.
Truth – The court does not consider how you acquired an asset in determining whether it will be exempt in your bankruptcy case. You must include it in your schedules at its replacement value. If it has a value greater than your available exemptions, it is subject to liquidation just like any other asset.
Bankruptcy Myth 10 – If I discover that my vehicle or other asset will be non-exempt in my bankruptcy case, I can simply transfer ownership to a trusted friend or family member to avoid losing it.
Truth – Your bankruptcy documents require you to declare under penalty of perjury that you have not transferred ownership of anything within two years prior to filing bankruptcy. Answering untruthfully may subject you to severe penalties including incarceration and very substantial fines. Moreover, if your friend or family member was made aware of the reason for transferring the vehicle, they may be prosecuted as well.
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