Five Common Misconceptions About Bankruptcy
1. I will lose all my property if I file bankruptcy.
It is true that in a Chapter 7 bankruptcy (liquidation bankruptcy), a trustee is appointed to administer property of value for the benefit of creditors. However, exemptions are available to individual debtors under State and Federal law that protect certain assets. In California, there are two sets of exemptions available: (1) 704 or “homestead” exemptions; and (2) 703 or “wild card” exemptions. The homestead set of exemptions is often used if an individual debtor has significant equity in their personal residence. The wild card set of exemptions allows an individual to divide a set amount of exemption on the property of their choice, either by using the full amount on one item or by dividing the amount amongst different items. The current amount allowed is $23,250, but that amount is set to increase on April 1, 2013. Both sets also provide limited exemptions for other property such as cars, retirement plans, jewelry, household goods, etc.
2. All debts are wiped out in bankruptcy.
Not true. While most consumer debts and business debts are wiped out in bankruptcy, certain types of debts are not affected. They include child support and alimony, most student loans, fines, restitution, some taxes, debts due to a DUI, and debts incurred as the result of fraud. While these debts cannot be wiped out, some of them can be paid over time in accordance with a reorganized plan (i.e. Chapter 11, 12, or 13 bankruptcy).
3. Taxes cannot be eliminated in bankruptcy.
Not true. In some cases, incomes tax debts can be eliminated in bankruptcy. Whether income tax debts can be eliminated depends on how old the taxes are, if and when tax returns were filed, if and when the taxes were assessed, and whether the taxpayer filed a fraudulent return or willfully attempted to defeat or evade payment of the tax. If the taxes cannot be eliminated, it may be possible to stop interest and penalties from accruing.
4. I will be unable to obtain credit for 10 years if I file bankruptcy.
While a bankruptcy filing may remain on an individual’s credit report for up to 10 years from the date the bankruptcy is filed, it is common to receive credit offers soon after filing bankruptcy. Some companies actively market to people who have filed bankruptcy. It is important to review any credit offers carefully as they will likely have high interest rates and may require the borrower to give the lender a lien against the borrower’s property to secure the loan.
5. My spouse must file bankruptcy if I file bankruptcy.
Not true. In most cases it makes sense for both spouses to file for bankruptcy protection if both spouses are obligated on the debt. Otherwise, creditors may pursue the non-filing spouse for the full amount of the debt. If both spouses are not obligated on the debt, or if one spouse does not want to file, one spouse can file without the other.