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Bankruptcy Myths



1.  I Will Lose All of My Property

People think they will have to sell their property or that the government will take all of their property in order to pay creditors. This is just not so. There are exemptions in Colorado that are really quite generous. The idea is to give people a fresh start, not to put them on the street. You have the ability to keep at least $75,000 of equity in a home, and $7,500 of equity in a car, for example. It is rare for people to lose property in a chapter 7 case.

If you do have property worth more than the exemption amounts, it is common practice for trustees to accept payment for those items, rather than seize them. This is essentially buying your own stuff back. Makes perfect sense as the trustee in your bankruptcy has an easier job and you get to keep items that are important to you. In my experience in Colorado, this is how most people keep their guns for example.


2.  I Will have to Go Through Humiliating Questioning and Arguments.

This is not so. In fact, many people regret that they don’t get the chance to explain their situation and bad luck. Bankruptcy is about the math of repayment. When the forms are filled out correctly the Court and the trustee can see that repayment is impossible and you will get a fresh start by having the court wipe out most types of debt. Because the forms lay everything out with respect to ability to pay, there is rarely an argument or even a question about a debtor’s intentions in seeking a bankruptcy.

As for Court, it typically takes five minutes and is about you proving your identity and swearing under oath that the information you put in your forms is accurate. You sit with a trustee who will be polite and respectful and the only other people around are typically other debtors and lawyers. It is a good deal less stressful than most people expect.



3.   I'll lose everything I have

This is the misconception that keeps people who really should file for bankruptcy from doing it. People think the government will sell everything they have and they'll have to start over in a cardboard box. You have what are called exemptions for most of your property. Pensions as well as IRA's are protected. If you do however have valuable assets which are valued over your exemption, you would not file a Chapter 7 but instead a Chapter 13, which is a non- liquidating bankruptcy.

4.   I'll Never get Credit Again

It is actually the opposite. You will get offers for credit cards and car loans directly after filing. This is because creditors know you cannot file a chapter 7 again for 8 years, not because they are being nice or trying to “help” of course.

For people who are looking to own a home you may have problems getting the best types of mortgages for one to two years after you file. But if a bankruptcy is necessary it’s often the case that credit is improved by the filing. In other words when people thing “I will never be able to buy a home,” the answer is usually to say that if you don’t file, then that will be true.

Bankruptcy of course is not a help in getting credit. In particular, self employed people with ups and downs in their income do sometimes suffer from a lack of credit after filing. For these people planning a few years without that safety net, or rather without the safety net of credit cards, is probably wise. It can be hard to only have a few thousand in credit when you need help to get through a winter if you are a roofer, for example.

What I usually tell people is that it stays on your credit for ten years, but really only hurts you for two. This is because the best home loans and auto loans do not kick in until one to two years after a filing.

5.   If You're Married, Both Spouses Have to File for Bankruptcy

This is not true. If one spouse has significant debt and the other does not it sometimes makes sense to file for only one person in a marriage. Any debt that both spouses owe however will still be owed by the non -filing spouse. Even if one spouse is filing, you do have to qualify based on the income of both spouses.



6.  I Must Include All Debts and Cannot Repay Who I Want.

You must list all of your debt in a bankruptcy case but you can repay a friend or family member after the case if you so choose. You can also pay a doctor, dentist or other professional if you choose to do so.