Bankruptcy is everywhere. Bankruptcy affects everyone including, but not slight to, Debtors, Creditors, Lending Institutions, Accountants, Financial Analysts, Mortgage Brokers, Real Estate Agents, All Types of Lawyers, possible Homebuyers, Owners of Real Property, The President of the Bank of Mom & Dad, etc. Therefore, an understanding of the Bankruptcy Code and the principals enunciated therein are needful for everyone.
Bankruptcy law is highly complex and, like other specialties, takes a needful speculation of time to master. The purpose of this record is not to make you an scholar in Bankruptcy law. This record is intended merely to inform you of various misconceptions about Bankruptcy that arise every day. As with any area of the law, you should seek the guidance of an experienced attorney before taking any action.
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There are several misconceptions about Bankruptcy that everyone should be aware of. I will exertion to dismiss the most blatant misconceptions. Here is my Top 10 list of base Bankruptcy Misconceptions.
1. The debtor (footnote 1) must be broke to file Bankruptcy.
Nothing can be supplementary from the truth. With slight exceptions, the only requirement to file for Bankruptcy is that the Debtor cannot pay their bills as they come due (sometimes referred to as financial distress). This makes sense when given some thought. If a someone had to be broke to file Bankruptcy, that someone would not be able to pay their attorney, which would lead to a proliferation of pro se Debtors which would clog the Courts and drive the entire Bankruptcy Court principles insane.
Next, if the "broke" Debtor cannot file Bankruptcy, they would in all likelihood come to be social charges since they have nothing left to live on. To avoid this burden on the government, Congress has permitted "exemptions" to allow Debtors to keep a clear number of property despite the Bankruptcy filing. For example: in New York a someone filing for Bankruptcy is permitted to have, among other things, up to ,000 in cash, ,000 worth of equity in an automobile as well as unlimited funds settled in a remarkable 401K plan (footnote 2).
Finally, because individuals and businesses ordinarily wait till they are broke to seek Bankruptcy advice, this unnecessary delay precludes options ready to them which may help them reorganize their finances and permit them to keep part or all of their property. For example, an individual ordinarily waits until the day before a foreclosure sale to seek Bankruptcy guidance where had they sought guidance earlier; their chances of recovery the property would have been greatly improved.
2. If an individual files Bankruptcy, his/her credit will be ruined and (s)he will not qualify for credit in the future.
A blatant lie! The fact that an individual files for Bankruptcy will appear on the individual's credit record for up to ten years. While this may seem draconian, this is not as bad as it may first appear.
First, if an individual is inspecting filing Bankruptcy, their credit is probably not that great to begin with. Filing Bankruptcy may be their best bet to "get good credit" again. Why you ask? The rationale is simple. When a Debtor files for Bankruptcy under part 7 of the Bankruptcy Code and receives a dismissal (footnote 3), a Debtor cannot receive an additional one dismissal under part 7 for at least eight (8) years.
Lets pretend you are the head of a credit card enterprise in fee of deciding to whom to increase credit and you have two same applicants with one exception, one of the applicants filed Bankruptcy three months ago. Who would you increase credit to? Applicant #1 who never filed for Bankruptcy and who could file Bankruptcy at any occasion after taking your money thereby discharging your debt? Or would you increase credit to Applicant #2 who filed for Bankruptcy three months ago and who recently received a dismissal under part 7 of the Bankruptcy Code thereby insuring that your loan cannot be discharged under part 7 for at least the next eight (8) years?
The rejoinder is simple, in the above hypothetical, the someone who recently filed Bankruptcy is the best credit risk because an individual can receive only one dismissal under part 7 every eight (8) years. This, in reality results in the individual who filed Bankruptcy receiving dozens of new credit card offers within weeks of filing Bankruptcy!
3. If a someone files Bankruptcy, they cannot buy a house in the future.
Another lie! All banks are willing to take risks with population who filed Bankruptcy if they have enough security. This ordinarily means a higher interest rate but remember the lowest line here: banks are seeing to make money. If a someone who filed Bankruptcy in the past applies for a mortgage and that individual has a enough down payment, banks will be tripping over themselves to give them a mortgage.
4. If a someone owns a home and files for Bankruptcy, they will lose the house.
Yes and no. An individual in the five boroughs of New York, Long Island and Westchester is allowed to keep the first 0,000 in equity in their homes above all liens and encumbrances despite the Bankruptcy filing (the exemption is 0,000 for married couples filing Bankruptcy together). This is called the "homestead exemption." Lets look at a integrate of base scenarios:
"The individual is current on the mortgage, there is slight equity in the property and has a lot of credit card debt." Let's assume that the property is worth 0,000 and there is a mortgage of 0,000 on the property. In this instance, that individual can file for part 7 and still keep their house.
Let's turn the facts a bit. Let's say the same house is worth 0,000 but the individual has a 0,000 mortgage on the property. After we take into notice the 0,000 homestead exemption, the individual is left with 0,000 in non-exempt equity. If this individual files for part 7, the part 7 trustee (footnote 4) will sell the property and the individual will be given the first 0,000 from the proceeds of the sale. The point that needs to be emphasized here is that the individual will lose the house under part 7 unless after the filing of the Bankruptcy the individual can come up with 0,000 to pay the trustee the non-exempt equity. These funds can come from a post-bankruptcy mortgage or a loan from house and/or friends.
Next example: "The individual is behind on their mortgage, there is big equity in the property and has lots of credit card debt." In this example, assuming there is money left over each month after paying the quarterly monthly bills (the mortgage cost not including arrears, gas, electricity, food, etc.), if this left over money can satisfy the arrears on the mortgage over a duration of not to exceed five years, the individual may be able to keep the house in under part 13. part 13 is quite complex but its principle is simple. As long as the individual repays the debt, they can keep the property. This may be an oversimplification but the point to remember is there are options.
5. Taxes cannot be discharged in Bankruptcy.
Wrong! clear taxes are dischargeable in Bankruptcy such as clear personal income taxes that are more than three years old if clear requirements are met. As a normal rule, fiduciary taxes (e.g. - sales taxes) are not dischargeable. The Bankruptcy Code's provisions relating to taxes are quite complex and differ depending on the part filed under but suffice it to say, clear taxes are dischargeable.
6. Learner loans are non-dischargeable.
Generally speaking this is true. However, like every other rule there are exceptions. If the Debtor can prove clear hardship, Learner loans can be eliminated in Bankruptcy. This is ordinarily an uphill battle but indubitably not impossible.
7. An individual can file for Bankruptcy but not include clear creditors in the Bankruptcy.
Wrong! One of the principles behind the Bankruptcy Code is to treat similarly situated creditors equally. When a Debtor does not list a creditor in their Bankruptcy and decides to pay that creditor back, that Debtor is prejudicing the other creditors. If a Debtor does this, the Court considers this fraud and the Debtor can risk losing their dismissal and in greatest circumstances face jail time as well as a hefty fine. Don't do it!
8. If I have to list all creditors in the Bankruptcy, I will end up cheating my mom by discharging the money she loaned me.
Although a Debtor must list all their creditors in the Bankruptcy; in clear instances the Debtor can repay a creditor after the Bankruptcy is filed. This is ordinarily known as a "Reaffirmation." All reaffirmations are subject to court approval. The surmise most Debtors agree to pay back a debt they have no legal enforcement to pay is to profess an existing enterprise relationship. In our example, the court would likely approve the reaffirmation if the Debtor lives with mom and worries that mom may throw him out.
9. I signed a piece of paper stating I cannot get rid of this debt in Bankruptcy and I am therefore stuck with it forever.
This is yet an additional one scare tactic. Although the Bankruptcy Reform Act of 2005 has modified this somewhat, there are state law remedies available. Consult with your Bankruptcy Attorney about these provisions.
10. I could lose my job if I file for Bankruptcy.
If you lose your job, you can sue your boss! The law states that if an individual can prove that an boss fired an laborer solely because the laborer filed Bankruptcy, the laborer can sue the employer. As a caveat, if the Debtor/employee looks for an additional one job after the filing of the Bankruptcy, the possible boss can use the Bankruptcy filing as a factor (not the sole factor) in deciding either to grant that individual employment.
As the above facts indicates, there are lots of misconceptions about Bankruptcy.
Neil E. Colmenares, Esq.
Footnote 1 - A "Debtor" is an individual or entity that owes money. The Bankruptcy Act of 1898 which was supplanted by the Bankruptcy Code of 1978 supplanted the term "Bankrupt" for "Debtor." One of the reasons for this turn in nomenclature was to help take off some of the social stigma complex in filing Bankruptcy. Remember, we are all Debtors.
Footnote 2 - For a perfect list of exemptions for Debtors who are domiciled in New York, see the New York Cplr Sections 5205 and 5206, New York Debtor and Creditor Law Sections 282 - 285 and the New York assurance Law Sections 3212 - 3213 and the United States Federal Exemptions settled in Title 11.
Footnote 3 - A dismissal is a court injunction relieving the Debtor of the enforcement to repay most debts and preventing creditors from collecting for same.
Footnote 4 - A "Trustee" is a someone appointed by the Court to administer the Debtor's estate. The Trustee's main function is to sell the Debtor's non-exempt property and use the proceeds to pay creditors.
This record is purely a social reserved supply of normal facts and it is not intended to be nor is it a source of legal advice. You should consult an attorney for guidance concerning your exact situation. This communication does not create an attorney-client relationship.
All possession reserved.
use this link Top 10 Misconceptions About Bankruptcy
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