Tragic Misconceptions About Bankruptcy

By NJ Lawyer, Theodore Sliwinski, Esq.


Misconception #1: Bankruptcy is dishonest.
Not true. Most people honestly want to pay their bills. Sometimes things happen that make it impossible. Bankruptcy is a legal right that is provided for in the United States Constitution. Bankruptcy is a right that protects honest people who are unable to pay their bills from harassment, lawsuits, wage garnishment and other creditor actions. Bankruptcy allows a fresh start. Many experts trace the roots of our bankruptcy laws to the Bible which says: At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1-2) Bankruptcy has been used many of our nation’s largest companies like Texaco, America West Airlines, Macy’s, T.W.A., Pan Am, A. H. Robbins, Penn Central, Wards, as well as famous people like Jerry Lewis, Mickey Rooney, Tammy Wynette and former Treasury Secretary John Connally. The same laws that are routinely used by corporate America, and the rich and famous, can protect individuals and families.
Misconception #2: I will lose all my property in a bankruptcy case.
Not so. The bankruptcy laws are designed to allow a fresh start. A fresh start would be impossible if you would lose all your property in bankruptcy. The fact is that most people don’t lose anything in their bankruptcy. The bankruptcy law allows the State government to decide what property is protected for bankruptcy cases filed in its state. In New Jersey you are allowed to keep most personal and household property, equity in your home up to $40,000, some equity in a car, most retirement plans, and many tools of the trade.
 Misconception #3: I can’t own anything after bankruptcy.
 Not true. Many people believe they cannot own anything after a bankruptcy. You can keep the property that is protected in the bankruptcy, and generally anything you acquire after the bankruptcy. The day your bankruptcy is filed acts as a “cut-off ” date. Anything you earn after the filing date is yours. Anything that you own or have owed to you before the case is filed is subject to the bankruptcy court’s rules. Most normal belongings are protected (as outlined above).
Misconception #4: I will never be able to establish credit after a bankruptcy.
Not true. Like many myths, there is a grain of truth to this one. Years ago it was almost impossible to rebuild credit after a bankruptcy. It took a long time. Times have changed. Many stores and banks actively market to people who have filed bankruptcy. Most mortgage companies can assist applicants with a bankruptcy after two to three years. As a practical matter, you won’t file a bankruptcy unless you can’t pay your bills. Because of that, your credit is probably already bad. A bankruptcy won’t make it any worse. After the bankruptcy you are likely to be in a better position to pay current bills and that should improve your chances of getting new credit.
Misconception #5: Bankruptcy gets rid of all debts.
Not so. Although most consumer and business debts are wiped out in bankruptcy some debts are not affected. Certain debts can’t be eliminated in bankruptcy. They include child support, alimony, fines, restitution, some taxes, loans obtained by fraud, student loans, debts due to a DWI, and debts resulting from “willful and malicious” harm. Some of these can be handled effectively in a Chapter 13 bankruptcy.
Misconception #6: I can protect my property by hiding it or giving it away before I file bankruptcy.
No. It’s a crime to hide property and not disclose it. It’s also a crime to give property away without telling the Court in the bankruptcy papers. The Court Trustee will seek to recover any property wrongfully transferred prior to a bankruptcy filing. You could end up in jail by attempting to illegally hide or transfer property.
Misconception #7: I will lose my job if I file bankruptcy.
Not true. The bankruptcy code prohibits an employer from discriminating based on a bankruptcy filing. In nearly 13 years of helping people in bankruptcy cases, I have never even heard of someone losing a job because of a bankruptcy filing.
Misconception #8: I filed a bankruptcy before, so I can’’t file again.
Incorrect. The law prohibits someone from filing a new chapter 7 bankruptcy within less than 6 years of a previous filing. Also, even within the six-year time period, a chapter 13 case may be filed. Don’t hesitant to call us if you have filed a previous case. You still have options that may help.
Misconception #9: I am not allowed to have a checking account if I file bankruptcy.
Incorrect. There is no rule that stops you from keeping or opening a bank account. Most people keep the account that they had and continue to use it without interruption. Sometimes it’s smart to close an existing account prior to filing bankruptcy. That’s because the bank involved may be a creditor in the bankruptcy. In general, if you do not owe any money to the bank your account is at, there is no reason to close the account.
Misconception #10: Taxes can’t be eliminated in bankruptcy.
Wrong. Many taxes are eliminated in bankruptcy. There are several complex rules that apply. Eliminating taxes depends on how old the taxes are, when the returns were filed, and whether the taxes have been assessed, and the type of taxes. Both federal and state income taxes can be eliminated in bankruptcy. Even in cases where the taxes cannot be eliminated, it’s often possible to force a payment plan on the IRS and stop interest and penalties from being added to the bill.
Misconception #11: I must be broke to file bankruptcy.
Not really. Although it would not make much sense to file bankruptcy when you are not in financial trouble, there is no requirement that a person be destitute. The bankruptcy code doesn’t require that you be unemployed, homeless, or own no property. In fact, you are able to file bankruptcy without losing your job, giving up your home, or having your property taken away.