Filing for bankruptcy can give you a chance to start over financially. Knowing the correct information about this process and its potential results is absolutely necessary when considering whether or not to file. Bankruptcy is a legal proceeding, which means it is surrounded by legal jargon. This can make sorting through the massive amounts of bankruptcy related information complicated.
Listed below are three bankruptcy misconceptions people often assume or have been led to believe; we’re going to set the record straight by giving you the truth. Hopefully, at the end of this article you will know what bankruptcy truly is and how it helps debtors out of many different troubled financial situations.
#1 - Debtor Must Be Completely Broke To File For Bankruptcy.
This is false. Debtors simply unable to keep up with their monthly expenses are eligible to file bankruptcy; there are additional eligibility requirements you must meet as well, which vary based on the chapter you file.
Chapter 7 Eligibility:
The size of your debt has nothing to do with your opportunity to file a Chapter 7 Bankruptcy – it solely depends on your ability to pay on your debts. Because your income directly affects your ability to pay off debt, there are specific income qualifications you must meet. Your average income over the past six months must be lower than your state’s median income. If your average income doesn’t fall below your state’s median income you must complete a “means test.”
The means test was designed to allow only those who truly can’t pay their debts to file Chapter 7 bankruptcy. This test calculates your disposable monthly income by subtracting your “allowed” monthly expenses from your monthly income. (Allowed monthly expenses vary by state and often by city as well, but commonly include your basic necessities such as housing, transportation, food, etc.)
Additionally you cannot file, if during the 180 days before you file:
- A prior bankruptcy petition you filed was dismissed
- You haven’t received credit counseling
Chapter 13 Eligibility:
For a Chapter 13 Bankruptcy you will need to be able to make regular installments on your debt, which in most cases mean you need to have an income. Additionally, the amount of your debt plays a role in your eligibility. Your unsecured debt must be less than $360,475 and your secured debt must be less than $1,081,400. These numbers are adjusted periodically to align with the consumer price index.
Additional eligibility requirements preventing you from filing, which relate to previous debt actions within the previous 180 days, include:
- Prior bankruptcy petition was dismissed due to your inability to comply with orders or appear before the court
- You voluntarily dismissed your petition after creditors sought relief from the bankruptcy court to recover property upon which they hold liens
- You failed to complete credit counseling
#2 - Family Members Who Have Loaned You Money Lose Out.
This is incorrect. You are required to list all creditors, including family members, in your bankruptcy petition. Depending on which Chapter you file and the nature of your debts, your family members could be repaid. In a Chapter 13 you can include your family members in your repayment plan. A Chapter 7 gives you the opportunity to reaffirm the debt you have with your family members, which requires approval from the court.
#3 - A Person Can Lose Their Job If They File For Bankruptcy.
Once again, this is not true. According to NOLO, “No employer -- government or private -- may fire you because you filed for bankruptcy. Nor may an employer discriminate against you in other terms and conditions of employment -- for example, by reducing your salary, demoting you, or taking away responsibilities -- because of your bankruptcy.” If you can prove that you were discriminated against because you filed bankruptcy, you can pursue legal action against your employer.
However, if you are applying for a job within a private company after having filed for bankruptcy, your potential employer can factor in the bankruptcy when deciding whether or not to hire you. Government agencies, on the other hand, cannot take this into consideration.
Financial burdens can be exhausting. Bankruptcy could be the right solution for you. Choosing this path is not easy, especially because of the many negative misconceptions that exist. Schedule a free bankruptcy consultation to discuss your fears and put other misconceptions to rest.
