1). Bankruptcy will haunt me forever – NOT TRUE
Chapter 7– A bankruptcy filing appears on a credit report for 10 years from the filing of a bankruptcy petition. Despite the reporting on your credit report your access to credit will come back very quickly, especially if you take some easy steps post discharge (See our blog post about steps to take post discharge to rebuild your credit).
When a Chapter 7 Case is filed your name and address are public record and notice is sent to the credit bureaus about the case filing. Car creditors especially will use this information to send you advertisements to purchase a vehicle the instant a case is filed. Our firm recommends that, if possible, you avoid purchasing a vehicle for about one year after a bankruptcy discharge. Instead you should focus on obtaining a credit card. Many of the major credit card companies will issue you a credit card with a small limit the instant a Bankruptcy is discharged.
If a Discharged Chapter 7 Debtor uses this credit line responsibly (never more than 30% of Credit Limit used, pay off in full end of the month) for approximately 1 year after their discharge, most Discharged Chapter 7 Debtors will qualify for a vehicle loan at a decent interest rate — less than 10%.
Federal Housing Administration guidelines generally dictate post discharged mortgage financing even on those loans that are not guaranteed by the FHA. This means that most Chapter 7 Discharged Debtors will be able to refinance a mortgage, purchase a new home, upgrade an existing home, etc 2 years after their discharge. (FHA Guidelines Change so Please Speak to a Qualified Loan Broker for more information).
Chapter 13– – A bankruptcy filing appears on a credit report for 10 years from the filing of a bankruptcy petition. A Chapter 13 Bankruptcy lasts for between 3 and 5 years depending on a Debtor’s income and factual situation. The time that the filing appears on your credit report starts to accrue at filing so once the plan is complete and discharge is entered the bankruptcy should show on a credit report for approximately 5-7 more years depending on the length of the Chapter 13 Plan.
Most Debtors find that upon completion of a Chapter 13 Bankruptcy that access to credit is not difficult. I have had clients who have immediately purchased new vehicles, homes, etc. It is even sometimes possible, with court permission, to purchase a home or vehicle while a Chapter 13 Case is active. Every client is different, and you must take steps to ensure your credit and payments to creditors and trustee are in order during your Chapter 13 case to be able to hit the ground running upon completion.
2). A Debtor’s Credit Score will never recover – NOT TRUE
Chapter 7 – Most clients find that if post discharge credit is used responsibly that their credit score has recovered to better than the minimum required by the FHA, 620, to purchase a home within 2 years of a discharge. Most clients find that the biggest improvement to their credit score comes just after discharge, mere months from the date the case was filed. In many cases, my clients have reported that their Credit Score improved while they were still in the Chapter 7 Bankruptcy. This is notable considering a Chapter 7 bankruptcy typically only lasts approximately 4 months.
Chapter 13 – Most clients find that their credit score has recovered to levels sufficient to finance homes, vehicles, etc. within 90 days of the discharge of their case.
3). I’ll never be able to finance anything again – NOT TRUE
There is a pattern emerging here to use of credit and its misnomers in relation to a bankruptcy filing. In both Chapter 7 and Chapter 13 contexts this is simply not true. For more information see numbers 1 and 2 above.
4). There is not much difference between Chapter 7 and Chapter 13 – NOT TRUE
A Chapter 7 Bankruptcy is a Liquidation bankruptcy. This means that all of your NON-EXEMPT property is liquidated, and the funds used to pay your creditors. Texas has VERY liberal exemption laws in comparison to many other states. Most people who own average property will not have to liquidate ANY assets. A Chapter 7 case lasts about 4 months from the date of filing until a discharge is granted. There is no ability to reorganize in a Chapter 7 meaning that there is no structure to come current on a vehicle or home if you are behind on payments on a car or house note. Most Chapter 7 debtors file bankruptcy to get rid of unsecured debt (credit cards, medical bills, payday loans, etc.)
Consequently, a Chapter 13 bankruptcy is a repayment and reorganization. This means that some of your creditors will be repaid at least in part if not in whole. If you own non-exempt property and do not want to lose it in a Chapter 7 a Chapter 13 gives the alternative of paying into your plan the value of said non-exempt property for the benefit of your creditors, but allows a Debtor to retain the property in their possession. More commonly a Chapter 13 is filed to reorganize and repay debts including, but not limited to, mortgage arrears, vehicle arrears, Federal Tax debts, and property tax debts. Chapter 13 bankruptcy allows a Debtor to retain those assets and continue to use them without fear of foreclosure or repossession. Upon completion of a Chapter 13 Plan the amounts that were behind upon commencement of the case have been repaid and the debt will be contractually current if not paid in full.
5). I’ll lose my house if I file for bankruptcy – NOT TRUE
Chapter 7 – Presuming you are current on your mortgage payments, do NOT want to give up your house, and you meet/ met in the past the requirements to have a homestead exemption with the County Appraisal District on the property and at least have an intention to return if you are not currently living in the property, this is not true.
Chapter 13 – Presuming you do NOT want to give up your house, and you meet/ met in the past the requirements to have a homestead exemption with the County Appraisal District on the property and at least have an intention to return if you are not currently living in the property the property is exempt from your creditors and you will not lose it in a Chapter 13. A Chapter 13 also adds the added ability to reorganize and repay arrears if you are not current on your mortgage payments, so you do not even have to give up your home in a Chapter 13 Bankruptcy if you are behind on the payments.
6). I can get rid of all of my debts with Bankruptcy – NOT TRUE
Not all debts are dischargeable in a Bankruptcy proceeding. Examples of non-dischargeable debts include, but are not limited to, most student loan debt, certain tax debt (specifically if a tax return was not timely filed, or falls outside of the dischargeability provisions of the bankruptcy code), debts obtained through fraudulent pretenses, etc.
7). Bankruptcy is a personal failure – NOT TRUE
No Debtors’ financial situations are the same, but many Debtors find themselves in bankruptcy court due to circumstances beyond their control. A major medical event, loss of income, divorce, separation, etc are some of the circumstances that many of my clients’ experience leading up to their filing. Many successful individuals have personally or had their businesses file for Bankruptcy. The Texas Rangers, American Airlines, Trump Hotels and Casinos Resorts, Larry King, Walt Disney, 50 Cent, and Willie Nelson have all filed for bankruptcy protection.
8). I don’t have enough money to pay a lawyer, but I can file bankruptcy myself – NOT TRUE/ TRUE
Our firm offers flexible payment options with as little as $300.00 required to get the process started. However, the question here is a question of prudency. Bankruptcy is one of the most complicated areas of law. A simple Bankruptcy Petition and Schedules consist of approximately 100 pages and several different documents that must be filed. Simple mistakes in the voluminous paperwork can result in a case being thrown out. An Attorney knows the deadlines that must be met as well as how to draft and file the correct paperwork. According to Ed Flynn of the American Bankruptcy Institute 96.2% of cases filed through an attorney were discharged. By contrast, people who represented themselves were successful only about 66.7% of the time. Those statistics are even more stark in Chapter 13 cases. Debtors who represented themselves in a Chapter 13 were successful just 2.3% of the time versus those who retained an attorney were successful approximately 41.5% of the time.