Due to recent legal changes, many people are taking a harder look at bankruptcy. Unfortunately, they may fall prey to some of the biggest chapter 13 bankruptcy myths and decide not to file, even though it could help.

Some laws which were debtor-friendly, like the Fair Debt Collection Practices Act, are now decidedly creditor-friendly. As a result, when divorce, job loss, serious illness, and other financial disturbances hit, bankruptcy is often the only shelter from the storm.

Bankruptcy immediately stops foreclosure, wage garnishment, and other adverse creditor actions. The Automatic Stay is just the starting point. Despite what some of the myths of bankruptcy imply, there are other benefits as well.

Most of these benefits are embedded in the law. There are others which only an experienced Athens bankruptcy lawyer can unlock. Without this professional partnership, you and your family could be missing out on some loopholes which could save you thousands of dollars. Furthermore, an attorney gives you solid advice based on the facts, instead of advice that’s based on some popular bankruptcy myths.

Chapter 13 Myth 1: You Will Lose Everything

That you will lose everything is perhaps one of the biggest Chapter 13 bankruptcy myths. Many bankruptcy myths have at least some factual basis. In other words, many bankruptcy myths are more like bankruptcy misunderstandings. This one is different. The “you lose everything when you file bankruptcy” belief is completely false.

Georgia has some of the broadest bankruptcy exemptions in the nation. If you file bankruptcy, this law shields your most important assets, such as:

• House,
• Motor vehicle,
• Retirement account,
• Personal property,
• Child/spousal support receipts,
• Current wages, and
• Government benefits.

As mentioned, the Automatic Stay usually prevents creditors from liquidating your assets, even in a Chapter 7. The bankruptcy exemptions usually apply to the trustee (person who manages the case for the judge). Legally, the trustee may liquidate nonexempt assets in order to pay your creditors. But thanks to Section 44-13-100 of the Georgia Code, very few people have nonexempt assets.

Chapter 13 Myth 2: All Your Debt Vanishes

It would be nice if bankruptcy was a magic wand which instantly made your debts disappear into thin air. A federal judge does not have that kind of power. Come to think of it, that’s probably a good thing. Magic wands are often misused.

Bankruptcy does eliminate most unsecured debts, like medical bills and credit cards. A few unsecured debts, such as student loans and back taxes, are only dischargeable (forgivable) in some situations.

As for secured debts, like a home mortgage, Chapter 13 bankruptcy gives you the tools you need to eliminate this debt on your own terms.

The aforementioned Automatic Stay lasts for up to five years in a Chapter 13. During these sixty months, a debtor makes a monthly debt consolidation payment which erases secured debt delinquency. So, at the end of the protected repayment period, you have a zero past due balance.

Chapter 13 Myth 3: Bankruptcy Ruins Your Financial Future

Filing bankruptcy adversely affects your financial future, but bankruptcy certainly doesn’t ruin it unless you allow that to happen. Another of the biggest Chapter 13 myths doesn’t make sense because filing bankruptcy is one of the most useful things you can do to improve your financial future.

As mentioned, bankruptcy protects your house, car, and other secured debts. Paying these bills on time is one of the best ways to raise your credit score. Furthermore, as they emerge from bankruptcy, many people make thirteen payments a year. The extra $100 or so a month is inconsequential, especially if the debtor is used to making a large bankruptcy debt consolidation payment.

Be sure you designate this extra money as a reduction of the UPB (Unpaid Principal Balance). The extra payment means the loan is paid off quicker. That could save you thousands of dollars, assuming there’s no prepayment penalty, and there usually is not.

Moreover, former bankruptcy debtors have a much easier time acquiring additional secured debt, like a new car loan, then they thought they would. Many banks welcome former bankruptcy debtors. Since these borrowers have damaged credit, the bank can charge more interest and make more money.

In many cases, people who are still in bankruptcy can buy a car or even a house. An Athens bankruptcy lawyer must simply convince a judge to sign a motion to incur additional debt.

Chapter 13 Myth 4: Bankruptcy Means You Have Failed

If a player files bankruptcy in Monopoly, then yes, the player has failed. These destitute board game players also lose all their property. Maybe that’s where the aforementioned biggest Chapter 13 bankruptcy myths comes from?

Occasionally, a real-life bankruptcy indicates failure. Some people do file because of reckless overspending. But in almost all cases, overspending is a contributing cause, at best. High medical bills cause about two-thirds of all bankruptcy filings. Other common causes include divorce and job loss. Furthermore, as outlined above and below, bankruptcy gives you the tools you need to maximize your fresh start.

Business failure, like overspending, also causes a few bankruptcy filings. Generally, however, commercial failure is not your fault. Economic forces, like supply and demand, usually dictate the course of any business. 

Henry Ford might be the most famous failure-related bankruptcy. In fact, Ford filed bankruptcy twice. He finally pulled it together and released the famous Model T. Your bankruptcy experience might not have that happy of an ending. But it could.

Chapter 13 Myth 5: Bankruptcy Ruins Your Credit

This myth is partially true. Bankruptcy lowers your credit score. In fact, a bankruptcy filing will probably lower your credit score more than almost any other single event. Foreclosure and repossession are usually the exceptions. These entries, which bankruptcy prevents, usually mean the debtor simply quit. If you file bankruptcy, especially a Chapter 13, at least you did something.

Most people who file bankruptcy already have poor credit scores. Month after month of late payments quickly lower most credit scores. Bankruptcy usually drives your score from bad to really bad. However, your score only stays really bad if you do nothing.

We’ve already talked about some ways to improve your credit score after a bankruptcy filing. Obtaining a credit card, and using it responsibly, might be the best possible way to propel your score higher.

Generally, former bankruptcy debtors receive a number of credit card offers. These banks know that the debtor cannot file bankruptcy again, and receive its full effects, for several more years. So, obtaining a card usually isn’t a problem. 

Using it is usually the tricky bit. The average credit card interest rate is over 20 percent. With rates that high, it doesn’t take much overspending to get into real trouble.

A secured credit card, or an unsecured one with a very low balance limit, is a good place to start. Charge something every month, like a week’s worth of groceries, and pay most of the balance every month. Carry a few dollars over to the next month so the bank earns a little interest. When banks make money, they usually make more favorable credit score reports.

Chapter 13 Myth 6: Bankruptcy is Morally Wrong

Right, wrong, and other moral terms are often subjective. What might be right for you may not be right for some. That idea is not always true, but it does apply to bankruptcy’s morality.

As far as many people are concerned, a promise to repay money is as solid as any other oath. Once they commit to something, whether it be repayment, marriage, or anything else, they are all in. Other people at least have second thoughts about reneging on their financial obligations.

Bankruptcy discharge is an option, not a requirement. The judge eliminates the legal obligation to repay a debt, but not the debt itself. Therefore, if you want to pay a discharged obligation, you may do so. You may also repay the debt on your own terms.

On a related note, some people look down on bankruptcy debtors. These individuals usually believe the “bankruptcy means you’re a failure” myth which was discussed above. Since moral judgements are subjective, you cannot stop people from having or expressing these feelings. But you can stop people from discriminating against you simply because of a bankruptcy filing. Such behavior is illegal.

Chapter 13 Myth 7: You Can’t Recover from Bankruptcy

This myth relates to the financial future myth discussed above. But recovering from financial difficulties is really about regaining control of your finances. That’s what bankruptcy does.

Once people get behind on bills, creditors usually demand money they do not have or propose unreasonable “payment plans” which basically set the debtor up for failure. In this environment, it’s easy to feel like you are caught in a downward spiral.

Bankruptcy reverses these dynamics. Creditors cannot contact bankruptcy debtors and pressure them to accept payment arrangements they cannot afford. Instead, bankruptcy allows people to make income-based payments over time.

Furthermore, bankruptcy gives you a chance to gain control over debt repayment arrangements. Your Athens bankruptcy lawyer has solid negotiation skills as well as solid litigation skills. Interest rates and other repayment terms must be renegotiated, since bankruptcy legally cancels all existing repayment agreements. Since interest rates are so low, your attorney has considerable negotiating leverage in these talks.

Chapter 13 Myth 8: Qualifying for Bankruptcy Is Hard

In 2005, Congress added some additional bankruptcy eligibility requirements. So, qualifying for bankruptcy is harder than  it used to be. But it’s not hard, if that makes any sense.

To file Chapter 7, your household income must be below the state average. In Georgia, as of March 31, 2021, that amount is $91,161 for a family of four. If you are slightly above that level, an Athens bankruptcy lawyer can probably use your expenses to meet this standard.

Chapter 13 debtors must be underneath a debt ceiling. Their secured debts cannot exceed $1.4 million and their unsecured debts cannot exceed $400,000. These totals include current and past-due obligations.

There are some informal qualifications as well. Chapter 13 debtors must have sufficient disposable income to fund a monthly debt consolidation payment. Chapter 7 debtors normally must be slightly in the red every month. Otherwise, the trustee might ask some unwanted questions.

Chapter 13 Myth 9: Filing Bankruptcy Is Complex

Filing bankruptcy is a bit like filing a corporate tax return. Most people couldn’t file a corporate tax return by themselves, especially if they do not have the IRS instructions which come with the forms. However, most people know enough about corporate taxes to follow basic income and deduction formulas.

Bankruptcy is much too complex to file on your own, unless you are filing a no-asset Chapter 7. But a skilled Athens bankruptcy lawyer knows how to break down complex topics so you can make the best possible decisions.

Chapter 13 Myth 10: You Can Only File Bankruptcy Once

If former debtors work to rebuild their credit scores, as outlined above, they might only have to file bankruptcy once. But the aforementioned financial storms of life almost always strike more than once. Sometimes, you can weather these storms. Other times, you need to seek shelter. So, bankruptcy is still available.

Two rules come into play here. There’s a discharge waiting period and a rule which discourages serial filing.

The discharge waiting period depends on the type of bankruptcy, as well as the filing sequence. Since the rules are somewhat complex, you might want to strap yourselves in.

• Chapter 7 to Chapter 7: Eight years
• Chapter 13 to Chapter 13: Two years
• Chapter 13 to Chapter 7: Six years (in most cases)
• Chapter 7 to Chapter 13: Four years

Note that these waiting periods apply to a subsequent discharge. But debt discharge is only one of the benefits of bankruptcy. Sometimes, the other benefits are so significant that the no-discharge rule does not matter.

Assume Michael files Chapter 7 to eliminate some back taxes. But he doesn’t qualify for a discharge. When the judge closes Michael’s Chapter 7, he might be able to immediately file a Chapter 13. He’s not eligible for a discharge, but since the Chapter 7 dissolved most of his debts, he doesn’t need a discharge. Michael just needs time to repay the IRS, and the protected repayment period is available.

Speaking of the Automatic Stay, multiple filings within the more recent six months give the Automatic Stay a more limited effect. Normally, an Athens bankruptcy lawyer can file a motion to extend the Stay, so the debtor enjoys most or all the benefits available under Section 362 of the Bankruptcy Code.

Find Out If You Can File Bankruptcy from a Georgia Bankruptcy Lawyer in Athens

Bankruptcy myths are everywhere. Now that the biggest Chapter 13 bankruptcy myths have been addressed, you can see all of them are at least mostly untrue. For a free consultation with an experienced Athens bankruptcy lawyer, contact Morgan & Morgan, Attorneys at Law, P.C. After-hours visits are available. Call us at 706-843-2905.