- Top 5 Misunderstandings About Bankruptcy
Bankruptcy is one of the most misunderstood areas of law.
Because it is a consumer protection mechanism, it is the sort of legal process that tends to be discussed among non-lawyers. It is, therefore, the sort of thing that tends to be discussed incorrectly.
A statement about Chapter 7 or Chapter 13 bankruptcy in Michigan made by anyone other than a Michigan bankruptcy lawyer will, naturally, likely be wrong. CPAs and realtors, in particular, have a bad habit of providing pseudo-legal advice under the umbrella of their non-legal licenses.
It is important, therefore, when considering filing for bankruptcy that you obtain good information from a good source.
Friends, family members, co-workers, your boss, and, yes, your accountant and your realtor, all mean well. They all want to help.
However—they shouldn’t. Even a non-bankruptcy attorney should simply refer you to a bankruptcy lawyer rather than offering information. (Generally non-bankruptcy lawyers will do this, understanding the legal ethical obligation to provide competent advice that is not outside of one’s scope of actual expertise.)
This article is intended to quickly correct a few of the most common misunderstandings about the Chapter 7 and Chapter 13 bankruptcy process disseminated by non-lawyers.
Top 5 Misunderstandings About Bankruptcy
Bankruptcy Will Destroy Your Credit
Will bankruptcy destroy your credit? “Destroy” is a strong word. The better question is, “Will bankruptcy affect your credit?”
Yes, filing a Chapter 7 or Chapter 13 bankruptcy will affect your credit.
However, before running screaming for the bankruptcy lawyer’s door, you need to ask yourself how good your credit was to begin with, if you’re in the position of speaking to a bankruptcy lawyer.
Odds are pretty good that your credit already isn’t great.
There are certainly those cases, for any bankruptcy lawyer, in which a client is preemptively seeking a consultation and exploring bankruptcy options before actually missing monthly credit card installment or mortgage payments.
Then, there are the rest. Those who have tried too hard to “avoid” bankruptcy. Filing for bankruptcy will likely be beneficial to their “credit.”
A Chapter 7 or Chapter 13 bankruptcy will discharge and close out the bad, delinquent debt on your credit report, leaving you the opportunity to rebuild your credit in a positive way, from a set point in time.
That is hardly “destruction.” Rather, it is a new beginning.
Bankruptcy Is Immoral
It’s difficult to argue with this misunderstanding because it isn’t rooted in an informational gap or logic.
People believe this are moral or immoral on the basis of an internal calculator or because of an external philosophical rule system that says this is or isn’t the case.
However, with bankruptcy, people are often making a knee-jerk statement when making this claim. It just feels wrong to not repay the debts that, largely, you voluntarily agreed that you would repay by way of a loan contract.
This is feeling is misplaced.
The obligation to repay a loan is a legal obligation. You are obliged to do so because and only because you signed a contract agreeing to do so.
A contract is a legal mechanism. It is not a moral mechanism.
Bankruptcy is another legal mechanism. It exists because the Founding Fathers in drafting the US Constitution believed (and stated so in that particular writing) that bankruptcy should be offered to Americans.
The US Congress drafted the US Bankruptcy Code allowing you to discharge debts which you contracted to repay because you are more economically useful to the rest of us if you are not bogged down with inescapable debt.
Without debt, your children are better fed, better clothed, and better educated. Without debt, you may start a new company that eventually employs thousands of people.
In debt, you serve no economic purpose other than to pay an egregious interest-rate to a single lender that probably evades its tax obligations every chance it gets.
The entity that lent you some money is, moreover, nearly in all cases an unfeeling, unthinking corporate structure. You cannot hurt a bank’s feelings. The bank will not “hate” you later. It doesn’t care.
When considering filing for bankruptcy, you will make this tough decision easier if you remove such misgivings from your calculation.
You’ll Never Buy a New Car Again After Bankruptcy
In Detroit, the need for a reliable car is very important. Metro Detroit does not offer a reliable system of public transportation that fully encompasses the tri-county area. Thus, the question of whether you will be able to buy a new car after a bankruptcy is extremely important to people.
However, it is incorrect that you will not be able to buy a new car after bankruptcy. This is incorrect for the same reason that your credit is not destroyed by the filing of a Chapter 7 or Chapter 13 bankruptcy.
After your bankruptcy discharge, your credit reports will need some attention. Your suitability for lending will need to be re-proven on paper.
However, if you have a job, if you have income coming in, if your debt-to-income ratio is now drastically improved by the discharge of all of your debt, there is no reason to believe that you will not be able to obtain financing for a new vehicle after bankruptcy.
It is simply a question of timing and the interest-rate you will pay.
How long can you wait to buy a new car after your Chapter 7 or Chapter 13? The longer you wait, the more time you can spend re-building your credit.
The sooner you attempt to obtain financing, the higher an interest-rate you are likely to pay in a new vehicle loan transaction.
If you have no income and are not employed, the bankruptcy will not be the reason you can’t finance a new car.
You Won’t Get a Mortgage After Bankruptcy
Likewise, if you can’t obtain a mortgage prior to your bankruptcy, a bankruptcy is not going to hurt your odds to any greater extent.
If your debt-to-income ratio is one of the things keeping you out of the housing market, a bankruptcy may actually be beneficial to your chances of new home ownership, as noted above.
That said, there is a grain of truth to this one.
It is a fact that Fannie Mae and Freddie Mac, the quasi-governmental underwriters of the vast majority of home mortgage loans in the United States, impose moratorium periods for new mortgages after various negative credit reporting events.
These events include bankruptcy, as well as foreclosures, short sales, and other such occurrences.
For Chapter 7 bankruptcies, the default lending moratorium period is 48 months unless there were extenuating circumstances that can be documented.
For Chapter 13 bankruptcies, the moratorium period is 24 months unless there are extenuating circumstances.
Some types of loans, such as VA loans, result in shorter yet moratorium periods.
You can apply for a new mortgage after bankruptcy. The question, simply, is when.
You’ll Be Fired If You File For Bankruptcy
It is a violation of the US Bankruptcy Code (that is, Federal law) for an employer to terminate you simply because you filed for bankruptcy.
However, if it were to happen, this would likely be a difficult thing to prove. Most employers are not stupid enough to provide you with a termination or employment denial letter stating outright that a decision is based exclusively on a bankruptcy filing.
Case-law arising from the Eastern District of Michigan Bankruptcy Courts and elsewhere has also brought some nuance to the question that is not necessarily debtor- or employee-friendly.
However, there has been no data provided by any source supporting a generalized fear of losing one’s job due to bankruptcy.
This has happened, in reality, if at all, to very, very few bankruptcy debtors.
Where one does need to tread carefully is with regard to various forms of licensure required to maintain employment, as well as government security clearances.
From casino gaming licenses to insurance brokerage licenses, these forms of licensure need to be handled carefully and properly by an experienced Michigan bankruptcy lawyer if individuals in those professions choose to proceed with a bankruptcy.
In general, what the license boards and renewal boards are looking for, normally, is truthfulness when they ask you if you have filed for bankruptcy. If you have and you answer, “No,” your filing is the easiest thing in the world to verify—and you can probably kiss that license goodbye.
The 6th Major Bankruptcy Misunderstanding: You Don’t Need A Bankruptcy Lawyer
This brings us to the 6th most common bankruptcy myth: that you don’t need a lawyer to file one.
While it’s true that there is no law preventing you from filing a bankruptcy without an experienced attorney assisting you, if you can figure out how, it’s a bad idea.
While everyone probably knows someone who says they know someone who managed to do it on their own without paying a few bucks (really, we don’t charge that much, not compared to, say, divorce lawyers!), these cases are always a mess. Even when they work out for the debtor in the end.
Bankruptcy is not simple form-filling and filing. The case begins when you file your forms with the Bankruptcy Court. That’s where the trouble starts, if you’re going to have it. After filing is when your Chapter 7 Trustee tries to figure out how to sell your house and evict you, seize your jewelry and your stocks and bonds. After filing is when your creditors object to your Chapter 13 Plan and try to have your case dismissed.
You need a lawyer to prepare your bankruptcy petition properly. But, then, you especially need a lawyer to fight these adversaries after you file.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Detroit-area Chapter 7 and Chapter 13 clients for over 20 years.
If you are confused about bankruptcy but need help with your debt, contact us now to schedule your free, initial consultation.