Filing for bankruptcy is not a pleasant affair, especially after trying your best to honor your debts or keep a business going in a tough economy. Chapter 7, 11, and 13 of the bankruptcy laws are perfectly legal debt relief options that give you a chance to start over even if you part with property.
The idea of filing under any of these codes is met with fear as many people are not conversant with the intricacies of this process, which makes the decision even harder. Los Angeles Bankruptcy Attorney has a wealth of experience handling such cases, and we have prepared a handy guide on common bankruptcy myths.
- Filing for Bankruptcy Makes Me a Failure
The term bankruptcy often carries a lot of stigma as people are afraid of being judged harshly by creditors, family, friends, industry colleagues, and so on. You may prefer drowning in debt to salvage your pride rather than let people get an inkling of your dire financial situation.
Be that as it may, NerdWallet notes that the majority of personal bankruptcies are linked to medical bills as the cost of deductibles is growing much faster than wages. As per 2014 estimates, 54 million Americans under 65 would struggle to clear a medical debt, and almost 17 million would take a hit in their credit rating owing to medical expenses. Even people with health insurance are not spared either; 10 million would still face bills that are beyond their means.
Seeing how many people are affected by medical bills and how this could damage them financially, filing for bankruptcy is nothing to be ashamed of, and neither does it speak to your character. Reasons beyond your control can also contribute to debt struggles such as losing your job to company downsizing or an economic downturn or a bad divorce.
Instead of holding off until mounting debts cripple you and affect other areas of your life, such as being unable to buy groceries or make rent, consider this debt relief option sooner. Also, bankruptcies are in the public domain, but there are so many filings per year that make your case less conspicuous.
- Filing for Bankruptcy Means l Lose Everything
Another great fear associated with bankruptcy is the fear of losing everything and starting over. This deduction couldn't be further from the truth as the majority of filings are likely to leave you with significant assets. Chapter 7 bankruptcy code is typically a no-asset case, so you don't forfeit any possessions, all thanks to exemptions that vary from state to state.
Exemptions are legal guidelines that dictate what property and other assets, and how much of their equity you can retain upon filing for bankruptcy relief. In California, there are two kinds of exemption laws you could choose from:
The California exemption allows you to retain a large share of the equity of your primary residence valued anywhere between $75,000 or $100,000 and $175,000. This exemption comes in handy where the property value is sizeable and so retaining ownership would be a smart business move. This law, however, only accords you minimal exemptions for your bank savings and vehicles.
In California, the federal laws resemble those applied at the national level, and one stark difference is that your home is not subjected to generous exemptions. The Federal homestead exemption allows you to retain $29,275 equity of your residence, which means you lose a massive chunk of the home is highly valued. Federal exemptions help you maintain a sizeable portion of personal assets like savings in the bank.
Seeing the two exemption laws at play, this myth about losing everything you have worked for is proven untrue. Nonetheless, it is imperative that you understand there are non-exempt assets not covered by these laws, which means you could lose them. For instance, a vacation home, expensive instruments or collectibles not related to work, high art pieces, investments, etc. Filing under chapter 13 allows you to retain assets, but their current value is factored into the debt repayment strategy.
- Only Poor People File for Bankruptcy
Waning personal fortunes are not the only reason for filing for bankruptcy as mounting debt has no prejudice on the size of income or your status in society. Big earners like star athletes, captains of industry, and other well-paid professionals are not immune to bankruptcy charges. By definition, bankruptcy is a legal method people or entities (like companies) use to see relief from a portion or all outstanding debts which they are otherwise unable to pay.
Bankruptcy is so prevalent that some famous people used this approach to step back then propel themselves back to solvency, with a lot of hard work and sacrifice. Dave Ramsey, one of the most heralded personal financial advisors of this generation, overleveraged holdings at his brokerage firm – Ramsey Investments, Inc. – and under the pressure of creditors, he filed for bankruptcy. Ramsey has since risen from rock bottom and is now co-hosts a finance-centric radio program boasting of over 8.5 listeners.
Walt Disney, Elton John, and a host of other high-flying figures have filed for bankruptcy and attained astronomical success after that. All this to say, bankruptcy does not discriminate by socioeconomic status and it does not paint a grim picture of your life so you there is plenty of room to rebuild.
- Filing for Bankruptcy Absolves You of All Debt
While this channel helps in sorting out financial woes, filing for bankruptcy doesn't mean you escape unscathed and start a new life. Regular debts like credit card bills, personal loans, and medical bills can be wiped out but not entirely, and not all outstanding debts fall under this category. For instance, student loans are rarely discharged, and domestic obligations like spousal and child support fall squarely on you, so there is no reprieve.
Income taxes accrued in recent months is also not dischargeable, and if you wish to retain collateral on loan, you must continue servicing it as per the lender's terms. Therefore, even if the balance is absolved, the creditor retains the right to take assets listed as collateral, such as your primary residence. In such scenarios, reaffirmation of said loan might be the next best solution.
- My Employer Could Use Bankruptcy as Grounds for Termination
Bankruptcy regulations have a clause that safeguards you from discrimination by the government and most private employers, and the same protections extend to people associated with you. A private employer, however, could use this filing as grounds for dismissal if your job entails handling large sums of money, for example, managing big accounts at a hedge fund. As well, the government should not deny your licenses and permits to operate a business or professional practice if they find you were insolvent before bankruptcy or you currently have dischargeable debt.
Constitutional protections extend to how you are treated by your current employer; if word gets out that you filed for bankruptcy, it is illegal for them to discriminate against you in any shape or form. If you were on the promotion track, a bankruptcy file should not disqualify you from getting that big promotion or raise. A demotion or pay cut after filing under any chapter of the bankruptcy code is also deemed unlawful, and you are at liberty to fight such actions legally.
These provisions, however, don't typically extend to applying for new positions or during the probationary period. Depending on the job you are trying for, your prospective employer could be doing through screening into candidates. Applicants with bankruptcies on their roster may not fare well, especially in a cutthroat job market.
When filing under Chapter 13, the repayment dictates obtaining money from your paycheck, which means roping in your employer. If you are worried about hostile actions that could affect your job, you could request a waiver on deduction orders based on this sincere concern.
- Paying Off Every Debt is Better Than Filing for Bankruptcy
After seeing what sorts of assets, you get to keep and what you could lose, filing for bankruptcy may become an even bigger dilemma. Depending on the prevailing circumstances, filing for bankruptcy could be the smartest financial decision you can make. Before leaping, consult with a Los Angeles Bankruptcy Attorney to examine your case and advise you accordingly.
Your legal counsel will help you see the pros and cons of filing against attempting to pay off debt, albeit unsuccessfully. If you are so far in the red that paying off creditors in the next five years is not feasible, you are better off filing rather than allow the interests to keep compounding. Hurting your credit score may be worth letting go of the yoke of debt so you can start a new path of financial redemption sooner than later.
- Bankruptcy Only Affects You for About Ten Years
Filing under any chapter of the bankruptcy code means this charge will stay on your credit record for a while, but in some instances, you may have to disclose previous filings after this duration elapses. Future employers may ask you to disclose such details, or they will find this information when conducting applicant screening. The same goes for professional licenses and security clearances; having a bankruptcy charge is not very appealing.
Seeing how filing for bankruptcy affects your life now and after the seven to ten years window elapses, it is vital that you consult with a competent and wise Los Angeles Bankruptcy Attorney. As you will see in the next point, having a bankruptcy charge on your credit report for about ten years does not necessarily mean you will suffer adverse effects as a result.
Remember, we debunked that myth declaring people who file as unsavory characters. Taking legal and acceptable measures to handle debt means you are acting responsibly.
- Bankruptcy Will Ruin My Credit Permanently
While the fear of ruining your credit score is not unfounded, filing could be the best remedy for a failing credit score and what's more, it could be the only way of getting credit in the future. Since bankruptcy helps eliminate debts you cannot afford to honor, it allows you to resume repaying those debts you can handle. Ridding yourself of bad debts also will enable you to manage more credit in the future, and these points illustrate how bankruptcy helps your rating
There are many ways of computing a credit score, but the FICO® Score is the industry standard score for about 90% of money lending decisions. This scoring model factors in five things: repayment history (35%), current debts (30%), credit history (15%), new credit (10%), and credit mix (10%). Credit scores usually range between 300, the lowest rating, and 850, the highest rating.
High credit scores depend on you consistently paying debts as per schedule, something that you cannot achieve if you are sinking in debt. As well, customers with fewer obligations to handle are perceived to be more attractive by banks and credit card companies, although the latter may hesitate a little.
- Spouses Have to File for Bankruptcy Together
Most people in marital unions or domestic partnerships have joint bank accounts, and their finances are tangled in one way or another. Nevertheless, one spouse filing does not automatically mean the other must follow suit unless it is necessary.
Sometimes, individual filing can still have an impact on the other spouse as it only eliminates your liability over said debt but not your spouses. They are still obligated by law to satisfy their debts or any joint debts you have accrued inside the marriage or domestic partnership.
The law stipulates bankruptcy filing can affect the other partner under these circumstances:
- If you have joint assets (property and debt) with your spouse
- If state laws dictate as such
- Filing under Chapter 7 or Chapter 13 of the bankruptcy code
Joint liability means this charge will appear on your spouse's credit report, and once your creditors are notified of this filing, they are free to pursue your spouse for repayment. Since California is a community property state, your shared assets become the property of your bankruptcy estate so they can be used to honor the debt.
Consult a Bankruptcy Expert Near Me
In sum, filing for bankruptcy is a serious decision that calls for strategic thinking, whether it involves a business enterprise or personal debt. The journey to achieving better financial health starts with taking a candid look at your state of debt versus income to determine the best move. Do not leave things to chance; contact Los Angeles Bankruptcy Attorney at 424-285-5525 so we can decide whether you need to file and if so, what Chapter is most befitting.