During these difficult times, there has been much discussion in the media about the various government programs that are available to help families and small businesses deal with the economic fallout from COVID-19.
These programs are well intentioned and can be very helpful for some, yet a primary unanswered question remains: what about those individuals and small businesses that were struggling financially before COVID-19? A temporary stay of collection on student loans and foreclosures, stimulus payments, and low-interest loans are all helpful, but none of these programs will assist those who were already in severe financial distress and are now facing an even more difficult and grim financial outlook. The answer for those families and small businesses, as it has always been for those in severe financial distress, is in our bankruptcy system.
Bankruptcy is the true financial backstop for our economy, and now, more than ever, people may need to consider such an option even if they wouldn’t in the past. Over the past 18 years of consulting with people struggling with debt, I have heard many negative misconceptions and myths from potential clients about our bankruptcy system that stops them from even exploring bankruptcy as an option. Without filing for bankruptcy, these individuals and small businesses continue spiraling down a path of debt with ever increasing interest and fees that they will never be able to repay.
While it is true that bankruptcy certainly isn’t right for everyone, if someone is struggling with debt and bankruptcy then filing for bankruptcy is the most powerful financial tool that we have in our legal system to help individuals dig out from under the mountain of debt and reemerge with a fresh start in life. Here are five common bankruptcy myths that I have encountered in my practice:
Myth #1: Bankruptcy means that I will lose all of my property. This is false. The purpose of a bankruptcy is to get you back on your feet and provide you with a fresh start in life. It would be contrary to that policy to take away all of your assets and just hand them to your creditors, as you can’t get a new start in life if you don’t have any assets. In reality, there are different parts of the bankruptcy law that provide protections for property that you need to live and to move on with your life, as well as different types of bankruptcies for individuals who have more significant assets that they would like to try and protect, including their homes.
Myth #2: Bankruptcy is only suitable for people with no or low income or those with “a lot” of debt. This is also false. I always tell potential clients that debt and income are relative—what is a “a lot” to one person can seem small to someone else, and vice versa. The key is this question: based on your present income, can you make a financial plan to pay off your debt in a reasonable amount of time and still provide the basic necessities of food, clothing, education and shelter for your family while saving for the future? If the answer is no, then it doesn’t matter whether you have $10,000 or $1,000,000 in credit card debt and bank loans, or whether you are making $20,000 per year or $200,000 per year—you need to consider the debt relief that a bankruptcy filing may offer you. There are different bankruptcy paths and types of cases for varying debt and income levels that may help.
Myth #3: Bankruptcy will severely compromise my credit score. I get this one a lot. My usual answer is: what does your credit score look like now? And even if it is okay now, how is it going to look in a few months when you can no longer afford to make monthly minimum payments on your credit cards and the banks start reporting missed payments? Yes, a bankruptcy filing may drop that score, but that is then the floor; once your debt has been discharged in a bankruptcy, you can begin the process of rebuilding your credit and your score.
Myth #4: Bankruptcy will not get rid of all of my debt, so why bother? It is true that there is some debt that cannot be discharged in a bankruptcy. For example, alimony, maintenance and child support, and recent federal and state tax debts, are among some of the most common debts that cannot be erased in a bankruptcy. Mortgages and liens against your home and cars generally also remain and likely will not be removed. But most other credit card debt, medical debt, personal loans, unsecured bank loans, older tax debts, and money judgments may be discharged in a bankruptcy case. Even if you do have some non-dischargeable debt or mortgages, receiving a bankruptcy discharge of your other debt can free up your income so you can make payments on those non-dischargeable debts and give yourself a path to financial freedom that wouldn’t have existed otherwise.
Myth #5: Bankruptcy is “shameful” or just seems “wrong.” This is absolutely FALSE! The law allows creditors to pursue legal rights against individuals and businesses that cannot repay debts through judgments, garnishments, foreclosures and repossessions. The law also provides those same individuals and businesses with the legal right and financial tools to protect themselves from creditors by utilizing our bankruptcy system.
Most people don’t realize this, but bankruptcy is in our Constitution (Article 1, Section 8, Clause 4), which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” The founding fathers realized the importance of bankruptcy as a bedrock principle of the financial system of our great country. There is absolutely nothing “shameful” or “wrong” in exercising a legal constitutional right as a shield to protect yourself and your family from creditors. Using this incredibly powerful financial tool to rebalance the creditor-debtor relationship and put your family back on firm financial ground for a better and brighter future is your legal right.
In these challenging times and if you are in financial distress, you owe it to yourself and your family to consult with a qualified and experienced bankruptcy attorney to explore whether bankruptcy is right for you, and if it is, to discover the very real relief that a bankruptcy filing may bring. And that’s definitely not a myth.