Filing for bankruptcy is not a pleasant experience, especially when you have made every effort to pay your bills on time or keep your business afloat during a challenging market period. However, even if you have to give up some of your property, there are completely legal debt relief options available under Chapters 7, 11, and 13 of the bankruptcy rules. These choices allow you to start fresh and regain financial stability.

Many people are hesitant to file under any of these bankruptcy codes due to their unfamiliarity with the complexities involved. This lack of understanding further complicates the decision-making process. However, this blog offers a comprehensive guide to the popular bankruptcy myths.

I'm a Failure Because I Declared Bankruptcy

The word "bankruptcy" is often associated with stigma due to the fear of negative judgment from creditors, friends, family, coworkers, and others. Some individuals, to preserve their dignity, would rather endure overwhelming debt than reveal the extent of their financial struggles to others.

Due to the rapid increase in deductible costs compared to wages, medical bills have become a leading cause of personal bankruptcy. In 2014, predictions indicated that approximately 17 million Americans under the age of 65 would see a decline in their credit scores due to medical expenses, while 54 million would struggle to pay off their medical debts. Even individuals with health insurance are not exempt, as 10 million would still face the burden of unaffordable medical expenses.

Given the significant number of individuals affected by medical expenses and the potential financial hardship they may bring, it is important to understand that declaring bankruptcy does not reflect your personal qualities and is nothing to be ashamed of. Difficulties with debt can arise from circumstances beyond your control, such as a challenging divorce, an economic downturn, or job loss due to corporate downsizing.

It’s recommended to consider this debt relief option as soon as possible, rather than waiting until your increasing debts start hindering your ability to pay rent or buy groceries and impacting other areas of your life. Additionally, it is important to note that bankruptcy cases are publicly available, but the significance of your case may appear less notable due to the high volume of filings that occur each year.

Declaring Bankruptcy Means Losing Everything

One of the biggest fears associated with bankruptcy is the worry of losing everything and having to rebuild from scratch. However, this assumption is completely false as most bankruptcy filings allow you to retain a significant amount of assets. Chapter 7 bankruptcy codes are often classified as no-asset cases, which means that thanks to state-specific protections, you do not have to forfeit any of your property.

Legal restrictions, known as exemptions, specify the type of property and other possessions, as well as the amount of equity you can retain when filing for bankruptcy protection. In California, there are two different types of exemption legislation. These include the following:

  • California Exemptions

Thanks to the California exemption, you can retain a significant portion of the equity in your primary residence, which is valued between $75, 000 and $175, 000, or $100, 000 and $175, 000. This exemption is particularly valuable when dealing with properties of high worth, as it allows for wise business decisions regarding ownership retention. However, this regulation provides very limited exclusions for your vehicles and bank funds.

  • Federal Exemptions

The federal laws that apply in California are generally similar to those that apply nationwide, with one notable exception: there are no substantial exemptions for your residence. However, there is still some protection for your home's equity through the federal homestead exemption, allowing you to keep up to $29, 275. Unfortunately, you may still lose a significant portion of its higher value. On a positive note, you can retain a sizable amount of your assets, including bank deposits, thanks to federal exemptions.

The existence of two exemption rules disproves the notion that you would lose everything you have worked for. However, it is crucial to be aware that certain assets are non-exempt and therefore not protected by these rules, which means you may lose them. Examples of non-exempt assets include luxury vacation homes, expensive instruments or collectibles unrelated to work, valuable artwork, investments, and more. If you file under Chapter 13, you can retain your assets, but their current value will be considered in the debt repayment plan.

Bankruptcy is Only Filed by the Poor

Declining personal wealth is not the sole reason to file for bankruptcy. Increasing debt is not dependent on one's income level or social standing. Even prominent figures, such as elite athletes, business moguls, and highly compensated professionals, are not exempt from facing bankruptcy proceedings.

Bankruptcy, by definition, is a legal process that provides individuals or organizations, including businesses, with relief from some or all of their outstanding debts that they would otherwise be unable to pay. This serves as a reminder that bankruptcy does not discriminate based on socioeconomic standing and does not paint a bleak picture of one's life. It signifies that there are ample opportunities for rebuilding and bouncing back from financial challenges.

Declaring Bankruptcy Releases You from All Debt

Filing for bankruptcy does not guarantee a fresh start and a complete resolution of financial difficulties, although it can provide some assistance. While certain types of debt can be eliminated, not all outstanding obligations qualify for discharge. Examples of debts that may not be discharged include credit card bills, personal loans, and medical costs. It's important to note that domestic commitments like spousal and child support cannot be relieved through bankruptcy, and student loans are rarely canceled.

Recent income taxes are also non-dischargeable, meaning you must continue repaying the loan according to the lender's guidelines to retain the collateral. Consequently, the creditor retains the right to seize assets designated as collateral, such as your primary residence, even if the balance is fully settled. In certain situations, it may be the wisest course of action to reaffirm the loan in question.

My Employer May Terminate Me Based on Bankruptcy

Bankruptcy legislation includes a provision that safeguards individuals from discrimination by both public sector entities and the majority of private employers. This protection extends to other parties associated with you as well. However, it is important to note that if your role involves handling substantial sums of money, such as managing large accounts at a hedge fund, a private employer may potentially use your bankruptcy file as a reason for termination.

Moreover, if the government finds out that you were bankrupt before filing for bankruptcy or if you currently have dischargeable debt, it should not deny you licenses and permits to operate a business or take part in a profession.

Constitutional safeguards also apply to how your current employer treats you. They are prohibited from treating you unfairly in any way if they discover that you have filed for bankruptcy. Filing for bankruptcy should not hinder your chances of receiving a promotion or a raise that you were otherwise qualified for. It is also illegal for your employer to reduce your salary or demote you solely based on your bankruptcy filing. If you face such actions, you have the right to challenge them in court.

However, during the probationary period or when applying for new positions, these provisions usually do not apply. Depending on the position you are seeking, your potential employer may conduct a candidate screening. Bankruptcies on an applicant's record may not bode well, especially in a competitive job market.

To meet the repayment obligations when filing under Chapter 13, it is necessary to involve your employer by requesting deductions from your paycheck. If you have legitimate concerns about hostile activities that could potentially jeopardize your employment, you have the option to request a waiver of deduction orders.

It Is Better to Pay Off All Debts Rather Than File for Bankruptcy

When you come to realize the types of assets you can preserve and the potential losses you could face, declaring bankruptcy can become an even more challenging decision. Depending on your situation, filing for bankruptcy may be the best financial move you can make. Before taking any action, it is advisable to consult with a San Diego bankruptcy expert who can review your case and provide you with the necessary advice.

Your lawyer will help you evaluate the advantages and disadvantages of filing for bankruptcy instead of attempting to pay off your debt, which may prove to be futile. If you are heavily in debt and unable to repay creditors within the next five years, filing for bankruptcy would be a better option. While it may impact your credit score, the relief from the burden of debt is often worth it, allowing you to start anew on the path to financial recovery as quickly as possible.

The Effects of Bankruptcy Only Last for Ten Years

If you file for bankruptcy under any chapter of the bankruptcy law, the charge will remain on your credit report for a certain period. However, in certain cases, even after this period has passed, you may still be required to disclose any prior filings. In the future, employers may inquire about this information or discover it through applicant screening. The same applies to security clearances and professional licenses; having a bankruptcy charge on your record does not reflect positively.

Speaking with an experienced and knowledgeable bankruptcy attorney is essential due to the significant impact that filing for bankruptcy can have on your life, both in the present and for the next seven to ten years. It's important to note that having a bankruptcy charge on your credit record for approximately ten years doesn't necessarily guarantee negative consequences.

Bankruptcy Will Permanently Damage My Credit

While there is reason to be concerned about the potential impact on your credit, filing for bankruptcy may be the only option to obtain credit in the future and is often the ideal strategy to address a declining credit score. After filing, you can start repaying bills that you can manage, as bankruptcy allows you to eliminate obligations that you cannot afford to honor. These points demonstrate how bankruptcy can improve your credit rating, and clearing out bad debts will also enable you to access more credit in the future.

There are alternative methods for calculating credit scores, but the FICO® Score is the widely accepted industry standard for approximately 90% of loan decisions. This scoring model considers five parameters:

  • Ten percent for credit mix.
  • Ten percent for new credit.
  • Fifteen percent for credit history.
  • Thirty-five percent for repayment history.
  • Thirty percent for current debts.

Credit scores typically range from 300 (the lowest rating) to 850 (the highest rating). Being in debt makes it nearly impossible to consistently pay your bills on time, which is essential for maintaining high credit scores. Moreover, banks and credit card companies generally view consumers with fewer liabilities as more desirable, although the latter perspective may have some reservations.

Partners Should File for Bankruptcy Jointly

The majority of individuals in domestic partnerships and marriages have joint bank accounts, which can often be financially complex. However, unless it is necessary, one spouse's filing does not obligate the other to do the same.

Solo filing only releases you from obligation for the debt in question, not your spouse's. However, it can still affect the other spouse. The law still requires them to pay off any obligations they have and any shared debts that you have accumulated during your marriage or domestic relationship.

According to legislation, filing for bankruptcy can have an impact on the other partner in the following situations:

  • If you and your spouse have joint assets (debt and property).
  • If such is required by state law.
  • Filing under Chapters 7 or 13 of the Bankruptcy Code.

Due to joint obligation, this charge may appear on your spouse's credit record. Your creditors may contact your spouse to collect the balance once they become aware of this file. In California, a community property state, your common assets become part of your bankruptcy estate. This means that they can be used to repay the debt.

Find a Bankruptcy Lawyer Near Me

If you are considering declaring bankruptcy for personal or business-related debt, it’s a significant decision that requires careful consideration. The first step towards improving your financial situation is to honestly assess your debt-to-income ratio and determine the best course of action. To ensure you make the right decision, it's important not to take any chances. We at San Diego Bankruptcy Attorney will assess your situation and determine whether filing for bankruptcy is necessary. If it is, we will guide you in choosing the most suitable chapter for your specific needs. Call us today at 619-488-6168.