Getting To The Bottom Of Bankruptcy Myths

Bankruptcy is a complex area of the law about which there are many incorrect assumptions:

  1. "The 2005 bankruptcy law prevents people from filing for bankruptcy."
  2. "You can't file bankruptcy again for seven years."
  3. "Taxes are not dischargeable in bankruptcy."
  4. "You'll never be able to get credit."
  5. "You will lose all your property."
  6. "It stays on your record for seven years."
  7. "You don't owe enough money to qualify for a bankruptcy."
  8. "Everyone will know I filed bankruptcy."
  9. "If a claim is not scheduled in a bankruptcy, it is not discharged."

1. "The new bankruptcy law prevents people from filing for bankruptcy."

—Not true. The 2005 changes in the bankruptcy law may have been intended to keep some people from filing, and Congress did enact new methods to qualify people for the different types of bankruptcy. In our experience since the changes went into effect, most people we have represented are eligible for the same relief as before the changes.

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2. "You can't file bankruptcy again for seven years."

—Not true. Usually, there are two types of time limitations on filing "again." If a prior case was dismissed with "prejudice to re-filing" within a certain time, you may not re-file the case within that period of time.

However, there are limits on the availability of a discharge in bankruptcy, which is not available to a Chapter 7 debtor who received a discharge in a prior case that was filed less than eight years (not seven, as most people believe) before the present case. You may be eligible for a discharge under Chapter 13 within four years after successfully filing for Chapter 7.

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3. "Taxes are not dischargeable in bankruptcy."

—Not true. Generally, recent income taxes for the three prior tax years are not going to be dischargeable in Chapter 7. The provisions of the Bankruptcy Code are complicated, but in most cases, taxes older than three years, and for which returns were timely filed, will be dischargeable in a Chapter 7. Chapter 13 allows many people to pay the recent taxes on more favorable terms than they would receive from the IRS. Withholding taxes (and the 100 percent penalty assessed against responsible corporate officers) and other "out of trust" taxes are not dischargeable.

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4. "You'll never be able to get credit."

—Not true. In my experience, the negative impact of bankruptcy on one's credit-worthiness is significantly exaggerated. Ironically, because the debtor has just gotten rid of most — if not all — debts and cannot file a Chapter 7 bankruptcy for another eight years, the credit-worthiness of an individual is actually improved by the cleansing of a bankruptcy.

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5. "You will lose all your property"

—Not true. Bankruptcy law will allow you to keep the property you claim as exempt. For most people in Texas, the exemptions laws available under Texas law and through the Bankruptcy Code will allow you to keep all your existing property. The purchase money financing, such as mortgages and car loans, will need to be paid.

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6. "It stays on your record for seven years."

—Not true. It stays on your credit report for seven to ten years.

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7. "You don't owe enough money to qualify for a bankruptcy."

—Not necessarily. There is no "minimum" amount of debt that must be owed in order for a bankruptcy to make sense. Whether or not a person is in financial straits depends on his or her ability to make ends meet monthly. $12,000 in credit card debt may be nothing to someone making $4,000 a month, but for a pensioner trying to survive on $1,000 a month, it may be an insurmountable hurdle. Where the amount of debt is small in comparison to income, there is a possibility that the discharge could be challenged on the grounds that the bankruptcy was filed in bad faith.

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8. "Everyone will know I filed bankruptcy."

—Not true, especially in Texas. While bankruptcy filings are public record, as with most court documents, the local newspapers do not print a list of bankruptcy filings. So usually, the only people who will know about the bankruptcy are the people listed in the schedules and those whom the debtors have told (plus, perhaps, other people who filed bankruptcy and have their first meeting of creditors at the same time).

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9. "If a claim is not scheduled in a bankruptcy, it is not discharged."

—Not necessarily true. In a no-asset case in which the bankruptcy court sends out its standard notice informing creditors that it appears it will be a no-asset case and creditors therefore need not file claims unless notified by the trustee, and in which no assets are administered by the trustee, claims that are dischargeable have been held to be discharged. This does not apply to debts that are by their nature nondischargeable or to which an objection to dischargeability could be filed.

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We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.