Common Bankruptcy Myths

Truth – The median income/means test, which is the most significant change in the law, actually disqualifies relatively few persons who would have previously been able to file under Chapter 7.

Truth – Chapter 13 may achieve a very substantial reduction of your debt and is often an excellent alternative when Chapter 7 is not an option.

Truth – The means test only applies when more of your debt is consumer than non-consumer. Examples of consumer debt include credit cards, medical bills, home mortgages (personal residence), etc.. Examples of non-consumer debt include debts owed to vendors or suppliers of your business, mortgages on investment real estate, etc. As an example, a high income person, who would otherwise be disqualified under the means test, may be able to file Chapter 7 to avoid deficiencies on failed real estate investments if the mortgage amounts exceeded the total of his consumer debt.

Truth – The appearance occurs in a hearing room rather than a court room and is presided over by a trustee, not a judge. Bankruptcy trustee’s are local professionals, i.e. cpa’s, attorney’s, etc. who contract with the United States Trustee’s Office to evaluate bankruptcy cases. If the bankruptcy schedules have been prepared well and are supplemented with other documentation that the trustee will need to evaluate the case, the meeting is usually brief.

Truth – Bankruptcy is basically an impersonal process that applies the law with little regard for individual circumstances. There is no “necessity exemption” for a vehicle. If the vehicle’s value exceeds your available exemptions and you are either unable or unwilling to pay this difference to the trustee, you will lose the vehicle.

Truth – If you have not actually received and used your tax refund at the time your case is filed, unless it is exempt for some other reason, the trustee will seize it for the benefit of your creditors and you will lose the refund (and perhaps your friend as well!)

Truth – Your bankruptcy trustee is only concerned with record ownership of assets. Your parent’s home would be at risk of being sold to satisfy your creditors. The result would be the same if your name were placed on the title of a vehicle driven by a younger family member for insurance purposes. If your name appears on the title, the vehicle is yours, even if you’ve never been behind the wheel!

Truth – It is certainly understandable to feel a strong moral obligation to repay ones debts. However, you should be aware that retirement accounts such as 401 (K); 403 (b); IRA, etc. are exempt from creditors other than the Internal Revenue Service. These accounts are protected from creditors because legislators recognize that a person experiencing financial hardship should not be expected to mortgage his entire future in order to repay his debt. Sadly, I have often seen clients completely liquidate their retirement accounts before eventually being forced into bankruptcy anyway.

Truth – The court does not consider how you acquired an asset in determining whether it will be exempt in your bankruptcy case. You must include it in your schedules at its replacement value. If it has a value greater than your available exemptions, it is subject to liquidation just like any other asset.

Truth – Your bankruptcy documents require you to declare under penalty of perjury that you have not transferred ownership of anything within two years prior to filing bankruptcy. Answering untruthfully may subject you to severe penalties including incarceration and very substantial fines. Moreover, if your friend or family member was made aware of the reason for transferring the vehicle, they may be prosecuted as well.