There are a lot of misunderstandings about filing for bankruptcy which lead to a tremendous amount of confusion and heartache if you don’t understand your rights from the beginning. Why does this happen? Some of these myths are perpetuated in the media. Other times, people are often too embarrassed to tell a neighbor or relative they are considering a bankruptcy and often try to find the answers on the Internet, but this is where you will find a lot of misinformation. Although bankruptcy law is supposed to be a uniform federal law, the differences from state to state are substantial, and it is a ‘hit or miss’ proposition trying to find information you can trust. Let’s start with the basics and debunk some of the most common issues we see come through our doors every day.
Myth #1 – I will lose my home, car and other assets if I file bankruptcy.
Consumers keep their home, cars and other assets all the time in filing bankruptcy. The law in New Hampshire and Massachusetts is generous in terms of protecting the homesteads of homeowners who have to file a bankruptcy. Massachusetts has a $500,000 homestead exemption while a married couple in New Hampshire can protect $200,000 of equity in a home. Given the real estate market, this means keeping a home in a bankruptcy is seldom a problem. One of the purposes of an initial legal consultation is to ensure that you can keep everything you own.
Myth #2 – Bankruptcy law changes in 2005 did away with the right to discharge all credit card debt and it now needs to be repaid.
The media articles reporting changes to the U.S. Bankruptcy Code in 2005 were less than clear, and many people concluded that the new law outlawed the right to file the simple type of bankruptcy called a Chapter 7 which gets rid of virtually all debt subject to some exceptions. But this inaccurate. While the lending industry spent $108,000,000 to lobby Congress to make it more difficult to file a chapter 7, most of my clients who qualified for a chapter 7 before the law changed would continue to be able to file one under the new law. Chapter 7 bankruptcy remains the most common type of bankruptcy filed in the United States. While you have to meet certain income standards to qualify, once you do, you still eliminate of all of your credit card debt. There are still instances of non-dischargeable debt such as, student loans, most taxes, and domestic support obligations. Even if you don’t qualify for chapter 7, a chapter 13 bankruptcy doesn’t require full payment of all debt and it will stop the interest and collection fees from running on your cards as soon as it’s filed. A chapter 13 is better than a debt management plan because the amount you pay per month is based on what you can afford, not on the amount your credit card companies want you to pay.
Myth #3 – Draining a 401(k) or retirement account is a good way to pay off the amounts you owe to your creditors.
Make a hard decision before you liquidate pensions — not only for the obvious reason that you will need that money to retire, but also because if this doesn’t solve the problem, and you still have to file bankruptcy, you could have kept your pension in its entirety.
Myth #4 – It’s a good idea to pay my credit cards off by getting a home equity loan.
Avoid home equity loans. If you’re one of the lucky few who actually has home equity, taking out a loan to pay credit cards is rarely a good idea as it places your home in jeopardy if you default. In New Hampshire, the first $200,000 of home equity for a married couple is exempt from creditors in a bankruptcy, so it is wiser not to choose to share it with them.
Myth #5 – A bankruptcy will eliminate your need to pay alimony or child support.
Nothing could be further from the truth! If you have support obligations to an ex-spouse or to minor dependents, there is no discharge of these obligations in a bankruptcy proceeding. It is possible to discharge property settlement obligations from a divorce in a chapter 13. A competent bankruptcy lawyer can help you with the answer to whether you have a non-dischargeable support obligation or a potentially dischargeable property settlement.
A Reality Check
If you are finding yourself overwhelmed by credit card debt, medical debt, and collection calls and can see no financial solution, it is time to talk with a bankruptcy attorney to determine if filing bankruptcy will make a difference in your life. Talk with us, we can help.
Attorney Gaudreau can be reached by calling (603) 893-4300 or emailing him at office@attorneygaudreau.com.