Bankruptcy Mythbusters what is Consumer Bankruptcy?

The “Bankruptcy ruins your credit” Myth

• Bankruptcy does leave a blemish on your credit report.
• But ability to access credit actually increases for many people after they receive a bankruptcy discharge (albeit at a higher rate of interest).
• This is because a debtor cannot receive another discharge for several years—amount of time varies by chapter you were in and chapter you file in the future.
• Debtors routinely receive applications for credit cards and approval for car loans while they are in bankruptcy.

The “Repeat Filer” Myth

• Debtors can file repeatedly…but there are consequences for doing so.
• Cannot receive two discharges within a certain time frame. For example, a debtor cannot receive a discharge under chapter 7 for 8 years after receiving one in a chapter 7. This varies by chapter.
• Individual debtors who file within a year of a pending bankruptcy do not receive the full benefit of the stay. 30 day stay for one pending case within a year and no stay for more than one.
• The stay can be extended by motion.

The “Free House” Myth

• Many people think that you can get out of paying for your house or car, etc., by filing bankruptcy.
• This is simply not true for several reasons:
• Bankruptcy gets rid of contractual obligation (personal liability) on secured debts but does not remove a lien.
• You must maintain post-petition payments on mortgage in order to prevent a foreclosure of the home. Bankruptcy removes personal liability for the loan.
• In a chapter 13, you must repay pre-petition arrears over 3-5 years through plan.
• In a chapter 7, trustee can sell the home/car if there is equity above the state or federal exemption.

The “lose your stuff” myth

• Reverse of the “Free House” myth.
• There are state and federal exemptions that prevent the trustee from taking everything from you.
• In a Chapter 13 case you “pay to play.” Keep assets with equity by paying all disposable income for 3-5 years to creditors.
• However, in a chapter 7 case, the trustee can sell assets if they have value above the exemption. Once sold, trustee will pay to the debtor the amount of the claimed exemption.
• For example, a house (valued at $200,000) can be sold by the trustee if there is equity (no mortgage) but Debtor will be paid from proceeds of that sale in the amount of exemption, which varies by county($125,000 in Ulster County). Estate will retain $75,000 for unsecured creditors. If there is a $50,000 mortgage, estate will retain only $25,000 for creditors, etc.