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Bankruptcy Myths Debunked: Separating Fact from Fiction

September 5, 2024

Eight of The Most Common Bankruptcy Myths

The idea of bankruptcy is overwhelming, especially with the many misconceptions floating around. As experienced bankruptcy attorneys, we want to dispel these misconceptions and provide clear, factual information. This blog post will address some of the most common bankruptcy myths and hope to offer some clarity and peace of mind to those considering this important financial decision.

Understanding Bankruptcy Myths

Bankruptcy and its effects are frequently misunderstood. This often leads to fear and hesitation, especially for some people who might benefit most from it. Below, we'll debunk eight of the most common bankruptcy myths. Our intent is to help people make an informed decision about whether it might be worth filing for bankruptcy protection.

Myth 1: Filing for Bankruptcy Means You're a Failure

Fact: Bankruptcy is a legal tool designed to provide relief to individuals and businesses facing insurmountable debt and insolvency. It is not a reflection of personal failure but rather a legal and socially acceptable way to regain financial stability. Many people have had to file for bankruptcy due to unforeseen circumstances such as medical bills, job loss, divorce or economic downturns. This legal tool, adopted from English law, has existed since at least 1705 and its roots go back to biblical times.

Myth 2: You Will Lose Everything You Own

Fact: This is the worst chapter 7 myth. The vast majority of bankruptcy cases are “no asset” cases, meaning that all of the assets owned by the people in those cases are exempt, or protected, by the law. While technically a Chapter 7 bankruptcy allows the liquidation of assets to repay creditors, virtually all of the assets most people own, such as essential items, are exempt. These exemptions usually include your primary residence, car, personal belongings, tools of your trade, and retirement accounts. Each state has its own set of exemptions and most people in Oregon can also use the exemptions set out in the bankruptcy code. As long-time bankruptcy attorneys, we can help you understand what you can keep in Oregon. To learn more about whether all of your belongings are exempt, please call us or use the contact form to set up an appointment to discuss your situation. But it is no myth that many, many cases end with a determination that there are no non-exempt assets to liquidate. This is why they are called a “no assets” case. You get a discharge and a fresh start, but you lose nothing but the debts.

Myth 3: Bankruptcy Permanently Ruins Your Credit

Fact: While bankruptcy impacts your credit and credit score, it is not a permanent impact. In many cases, people see their credit scores improve shortly after their bankruptcy because they are no longer burdened by overwhelming debt. While it is true that bankruptcy is on your consumer credit report for ten years, with active steps to rebuild your credit and responsible financial management, most people find that they can get back to reasonably good credit in about two and a half years.

Myth 4: You Will Never Be Able to Get Credit Again

Fact: This is another common bankruptcy myth. Naturally, right after filing for bankruptcy, you may find it challenging to get credit. However, many lenders are willing to extend credit to individuals who have completed bankruptcy, but usually with provisions for the debt to be secured and possibly at higher interest rates. But secured credit cards and loans can also help rebuild your credit history. If you are not currently buying your home, rebuilding credit is very important as it is necessary to qualify for a mortgage. You can learn more on our Foreclosure Prevention Attorney page.

Myth 5: Only Financially Irresponsible People File for Bankruptcy

Fact: Most people who file for bankruptcy are financially responsible individuals who have encountered significant life challenges. Uninsured or underinsured medical expenses, divorce, medical emergencies, job loss, and business failure due to economic downturn are common reasons for filing. Often people who have had their finances under control for years can be hit with an unexpected setback. Bankruptcy provides a way to a fresh start for those who have experienced financial setbacks and find that their finances are now beyond their control.

Myth 6: All Debts Are Wiped Out in Bankruptcy

Fact: While bankruptcy can discharge most types of debt, not all debts are eliminated. Certain obligations, such as child support, alimony, and court fines are typically non-dischargeable. Obligations such as student loans and certain tax debts are dischargeable under certain conditions. As experienced bankruptcy attorneys, we can help you understand which of your debts can and which, if any, cannot be discharged.

Myth 7: You Can Only File for Bankruptcy Once

Fact: There are limits on how often you can file for bankruptcy, but it is always possible to file again if you experience a later economic hardship. The time between filings depends on the type of bankruptcy previously filed and the type of bankruptcy you wish to file now. For example, you must wait eight years after filing a bankruptcy which you received a discharge under Chapter 7 before filing for Chapter 7 again. However, you only have to wait four years before you can file for Chapter 13. If you need bankruptcy protection a second time due to new medical bills, for example, please contact us and we can explain your options.

Myth 8: Filing for Bankruptcy Is Complicated and Costly

Fact: While the bankruptcy process involves paperwork and legal proceedings, it is manageable with the help of an experienced bankruptcy attorney. The cost of filing for bankruptcy can vary, but we offer payment plans and affordable rates to ensure you get the help you need. In addition, the benefits of immediate protection from debt collection and the long-term financial benefits of being able to rebuild your credit in just a matter of years definitely outweighs the cost of the bankruptcy.

Speak With an Experienced Bankruptcy Attorney About Your Options and Get Answers to Any Questions You Might Have

Filing for bankruptcy is a major decision, but it doesn't have to be shrouded in mystery and misconceptions. We offer a free consultation so that you can learn about your options in bankruptcy and how it would work for you, without any pressure to make a decision. We usually schedule an hour so that there isn’t any time pressure and to give us plenty of time to understand your individual circumstances. We can do an exploratory, fact-finding phone conference and lay out the pros and cons without any need to make an immediate decision.

If you would like more details and want to know how bankruptcy would work in your personal situation, please contact us to set up a free initial consultation.

Bankruptcy Myths FAQ's

Will bankruptcy stop wage garnishments?

Yes, filing for bankruptcy halts wage garnishments and other collection activities immediately. In most situations, it will also allow you to recover funds taken in the 90 days before you file your bankruptcy case.
How long does a bankruptcy stay on my credit report?

A bankruptcy remains on your credit report for ten years from the filing date. However, with active efforts to rebuild credit and responsible credit behavior, most people find that they can rebuild their credit in two and a half to three years.
Can bankruptcy help with medical debt?

Absolutely. There is almost never a problem with discharging medical debt. Unfortunately, uninsured and underinsured medical expenses are one of the most common reasons why people have to file more than one bankruptcy.

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Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House?

By Judson Carsuone • May 11, 2022

Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House? Clients frequently ask about future credit after bankruptcy and especially about if they will ever be able to buy a home. The answer to this question is not always as simple as it should be because it varies by the type of home loan. This blog addresses special mortgages backed directly by the federal government such as Federal Housing Administration first time home buyer and rehabilitation loans. If you do not qualify for one of these loans, you should read our related blog on conventional mortgages and buying a home after bankruptcy. Just paste this link into your browser window: https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-how-soon-after-bankruptcy-can-i-buy-a-house The short answer is that a waiting period of one to three years after filing for bankruptcy is all that is required for Federal Housing Administration, Veterans Administration and US Department of Agriculture Rural Home Loans. But this is just as to the bankruptcy filing. Of course, you still need to take active steps after bankruptcy to rebuild your credit. Check out our blog posts on rebuilding your credit after bankruptcy https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit And, you have to have sufficient income, possibily a down payment and a good debt to income ratio to buy a house. A Chapter 7 or Chapter 13 bankruptcy will show on your credit report for 10 years and negatively affect your credit. However, loans targeted to special populations and backed by the federal government have rules that allow you to buy a home shortly after discharge. These rules are subject to change so we recommend that you consult a mortgage broker for the most up to date standards for qualifying. Here are the waiting periods for these loans so you can buy a house. ● If you otherwise qualify for an FHA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a VA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a USDA loan, you must wait at least 3 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. In addition, if you are in a Chapter 13 plan and you need to refinance, then FHA and VA can also help you. FHA loans used to refinance a home while in a Chapter 13 bankruptcy require up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But the loan proceeds must allow you to conclude your Chapter 13 plan as of the closing of the loan. We sometimes call this buying out your plan. This can work well if you have the equity. It is also possible to use VA loans to refinance a home while in a Chapter 13 bankruptcy. You need up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But you do not need to buyout your plan. Here is a brief description of these home loans. ● FHA first time home buyer loans allow for a low down payment currently at 3.5% with a credit score at or above 580, or 10% if your credit score is between 500-580. The property needs to pass an inspection. And there is a cap on these loans that varies by county. For example, a home in Lane County can qualify up to $420,000 but in Multnomah County that amount is $598,000. ● FHA rehabilitation loans have similar standards. However, the loan can include cash out to bring the home up to the required inspection standards. The cash out is limited to $35,000 for qualifying improvements such as replacing roofing, enhancing accessibility for a disabled person or making energy conservation improvements. ● VA loans for new home purchase start with a Certificate of Eligibility (COE) to show your lender that you qualify based on your service history and duty status. This is obtained from the VA. The VA does not always require a down payment but one may be needed depending on the amount of the loan. The property needs to pass an inspection. But unlike the FHA, the VA does not set standards for the loans as to credit or income. Typical lenders do want minimum credit scores in the 600 range. ● USDA rural home loans do not require a down payment. But the home and its location are essential to obtaining this type of mortgage. For example, the house size is usually 2000 square feet or less. In fact, the home buyer must need the home to have decent, safe, and sanitary housing and be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to be met. Income qualifications are lenient as the loan can include a payment subsidy and are only available to low income borrowers. The USDA doesn't have a fixed credit score requirement, but most lenders require a score of at least 640, and 640 is the minimum credit score you'll need to qualify for automatic approval through the USDA's automated loan underwriting system. Conventional loans require a longer waiting period between bankruptcy discharge and requesting a home loan. These types of loans are not guaranteed by the federal government and can require significantly longer waiting periods. But your state or local government may have other programs that can also help. And a bank involved in the Community Reinvestment Act (CRA) will also have loans available for low to moderate income home buyers. Finally, if you were impacted by recent fires and lost your home in such a disaster, the Small Business Administration and FEMA may have loan options to rebuild. Filing bankruptcy is usually just the first step to rebuilding your credit and putting yourself back on track to possible home ownership in the future.

Bankruptcy Attorney Q & A - How Soon After Bankruptcy Can I Buy a House?

By Judsone Carusone • May 11, 2022

Bankruptcy Attorney Q & A - How Soon After Bankruptcy Can I Buy a House? Clients frequently ask about their future credit ratings after bankruptcy and especially about being able to get a mortgage to buy a house. The answer to this question is not always simple as it varies by the type of mortgage. This blog addresses conventional home loans. If you qualify for a FHA or VA loan, you should read our related blog. Just pasted this link into your browser window https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-part-2-how-soon-after-bankruptcy-can-i-get-an-fha-loan-and-buy-a-house The majority of conventional home loans are sold with in 6 months by the original lender. Fannie Mae and Freddie Mac are the largest purchases of these home loans, buying upwards of 65% of the annual home loans. We call this the secondary mortgage market. The rest of these loans are purchased by banks, hedge funds and asset backed trusts. Over the life of a 30 mortgage, it may be sold several times. A bankruptcy or other major negative credit event will create a waiting period before you qualified for a home loan that can be purchase by Fannie Mae or Freddie Mac. Many original lenders want the home loans qualified for purchase by Fannie Mae and Freddie Mac. So they try to meet Fannie Mae and Freddie Mac standards in all cases. Here are the waiting periods for these home loans to be qualified for purchase by Fannie Mae and Freddie Mac. • A Chapter 7 or Chapter 11 Bankruptcy waiting period is 4 years from the discharge or dismissal date of the bankruptcy action. A 2 year waiting period is allowed if extenuating circumstances are documented. • A Chapter 13 Bankruptcy waiting period is 2 years from the discharge date or 4 years from the dismissal date. This shorter waiting period after discharge recognizes that borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan. A borrower who was unable to complete the Chapter 13 plan must wait 4 years. A 2 year waiting period is allowed if extenuating circumstances are documented as to a dismissed case. • A borrower who filed more than one bankruptcy within the past 7 years has a 5 five-year waiting period from the most recent dismissal or discharge date. However, two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy this is not considered a multiple bankruptcy situation requiring a 5 year waiting period. A 3 year waiting period is allowed if extenuating circumstances are documented and is measured from the most recent bankruptcy discharge or dismissal date. But the most recent bankruptcy filing must have been the result of the extenuating circumstances. You still need to rebuild your credit and avoid accumulating a lot new debt to before you can buy a house. And you have to have sufficient income and a good loan to value ratio to buy a house so you can meet the standards to qualify for a home loan. Check out our blog posts on rebuilding your credit after bankruptcy. Just paste these links into your browser window: https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit These bankruptcy waiting periods may or may not be better then the alternatives. Here are the waiting periods for non-bankruptcy major negative credit events. • Foreclosure requires a 7 year waiting period measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower. A 3 year waiting period is allowed if extenuating circumstances are documented. • Foreclosure and Bankruptcy on the Home Loan. If a home loan was discharged through a bankruptcy, the bankruptcy waiting periods is applied if the new lender can document that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable waiting periods applies. • Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale (often called a short sale), and Charge-Off of a Mortgage Account require a 4 year waiting period from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as reported on the credit report or other documents provided by the borrower. These events are alternatives to foreclosure. A 2 year waiting period is allowed if extenuating circumstances are documented. • A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through Remark Codes such as “Forfeit deed-in-lieu of foreclosure.” • A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through Remark Codes such as “Settled for less than full balance.” • A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status and is identified on the credit report with a manner of payment (MOP) code of “9.” Additional requirements may apply, especially when seek a shorter extenuating circumstances period. Only the purchase of a principal residence is permitted. Only limited cash-out refinances are permitted. You may need a larger down payment. For the purchase of second homes or investment properties and large cash-out refinances you must wait the full 7 years. These rules are subject to change, so one should consult a mortgage broker for the most up to date requirements for buying a home.

Questions You Will be Asked at Your Meeting of Creditors

By Judson Caruson • April 30, 2022

Most people are very worried about their Meeting of Creditors and about what kind of question they will have to answer. Here is the list of required questions and suggested general questions based on a list that has been prepared by the US Trustee's Office. SECTION 341(a) MEETING OF CREDITORS REQUIRED STATEMENTS/QUESTIONS The following statements and questions are required. The trustee shall ensure the debtor answers the substance of each of the questions on the record. The trustee may exercise discretion and judgment in varying the wording of the statements/questions, if the substance of the questions is covered. 1. State your name for the record. Is the address on the petition your current address? 2. Please provide your picture ID and Social Security number card for review. 3. Did you sign the petition, schedules, statements, and related documents and is the signature your own? Did you read the petition, schedules, statements, and related documents before you signed them? 4. Are you personally familiar with the information contained in the petition, schedules, statements and related documents? To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time? 5. Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules? 6. Have you previously filed bankruptcy? 7. What is the address of your current employer? 8. Is the copy of the tax return you provided a true copy of the most recent tax return you filed? 9. Do you have a domestic support obligation? (If so, you must complete a domestic support obligation form that your lawyer will provide. It requires that you list to whom you owe the obligation including the claimant’s address and telephone number.) Are you current on your post-petition domestic support obligations? 10. Have you filed all required tax returns for the past four years? SAMPLE GENERAL QUESTIONS To be asked when deemed appropriate. 1. Do you own or have any interest whatsoever in any real estate? If owned: When did you purchase the property? How much did the property cost? How much do you owe on it? What do you estimate the present value of the property to be? Is that the whole value or your share? How did you arrive at that value? Have you owned any real estate in the last 4 years that is not in your name now? If so, what happened to it. If it was sold, how much did you receive from the sale and what happened to those proceeds. If renting: Have you ever owned the property in which you live and/or is its owner in any way related to you? 2. Did you purchase or refinance a vehicle in the last 6 months? If yes, you will be required to provide a copy of the purchase agreement and registration to the trustee. 3. Does anyone hold property belonging to you? If yes: Who holds the property and what is it? What is its value? 4. Do you have a claim against anyone or any business? If there are large medical debts, are the medical bills from injury? Is there anyone you could sue? Are you the plaintiff in any lawsuit? What is the status of each case and who is representing you? 5. Are you entitled to life insurance proceeds or an inheritance as a result of someone’s death? If yes: Please explain the details. If you become a beneficiary of anyone’s estate within six months of the date your bankruptcy petition was filed, the trustee must be advised within ten days through your counsel of the nature and extent of the property you will receive. 6. Does anyone owe you money? If yes: Is the money collectible? Why haven’t you collected it? Who owes the money and where are they? 7. Have you made any large payments, over $600, to anyone in the past year? 8. Were federal income tax returns filed on a timely basis? When was the last return filed? At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government ? If yes: Inquire as to amounts. If you received your refunds before your case was filed, what did you do with them? Did you give any of them to family or friends? 9. Do you have a bank account, either checking or savings? If yes: What were the balances in each account as of the date you filed your petition? 10. When you filed your petition, did you have: a. any cash on hand? b. any U.S. savings bonds? c. any other stocks or bonds? d. any certificates of deposit? e. a safe deposit box in your name or in anyone else's name? f. any crypto currency? 11. Do you own an automobile? If yes: What is the year, make, and value? Do you owe any money on it? Is it insured? 12. Are you the owner of any cash value life insurance policies? If yes: State the name of the company, face amount of the policy, cash surrender value, if any, and the beneficiaries. 13. Do you have any winning lottery tickets? 14. Were you divorced in the last 4 years. If so, is there anything that it still owing to you are a result of that divorce. If you are married and your spouse is not part of this case, do they have any property in their name not listed on your asset schedules. If you were to be divorced or separated, do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding? 15. Have you been engaged in any business during the last six years? If yes: Where and when? What happened to the assets of the business? 16. Have you made any transfers of any property or given any property away within the last four year period ? If yes: What did you transfer? To whom was it transferred? What did you receive in exchange? What did you do with the funds?

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