Common Misconceptions About Chapter 7 Bankruptcy

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There are millions of people who have filed for bankruptcy over the years, yet there still are many misconceptions about bankruptcy overall and especially for Chapter 7.

Chapter 7 bankruptcy allows debtors to get a fresh start by eliminating dischargeable unsecured debts. The debtor is allowed to exempt assets up to certain dollar amounts and if his/her assets are completely exempted then he/she gets to keep them.

The following misconceptions are very common.

Misconception #1: Chapter 7 will ruin your credit for a long time.

While it might be true that your credit score can take a hit after filing Chapter 7 bankruptcy, it really depends on where your credit score is right before filing for bankruptcy. For example, if a debtor has a credit score of 600 or above then it is very likely that his/her credit score will fall below 600 after filing bankruptcy. But if a debtor’s credit score is already damaged, say in the 400’s or 500’s, then his/her score might not decrease much if any after filing bankruptcy. There could even be a jump in the score after filing bankruptcy if it’s already very low.

There are many creditors who are willing to lend debtors money right after a Chapter 7 discharge order comes through. This makes sense because the debtor would likely have a lower debt to income ratio due to unsecured debts being discharged. Also, if a creditor gives credit right after a Chapter 7 discharge it will not be easy for the debtor to get rid of that debt through another bankruptcy. The creditor basically has the debtor on the hook for a while.

Many debtors are able to obtain vehicles loans soon after the discharge order, albeit with somewhat higher interest rates. Many debtors are able to obtain house loans within 2-3 years after the discharge order comes through, provide they use that time to repair their credit score and save up for a down payment.

Misconception #2: You will lose all your assets.

Many people believe they will lose all their assets if they file bankruptcy. And while that might be true for people who have significant assets, most people who file for Chapter 7 are able to fully exempt all, or the vast majority, of their assets.

Most people don’t end up filing for Chapter 7 if they are going to lose a significant number of their assets, preferring Chapter 13 instead where they can keep their assets in exchange for paying their unsecured creditors.

Many people who file for Chapter 7 do so because they are able to exempt all or most of their assets. Each state has its own exemption scheme and some states even allow debtors to choose between the federal exemptions or the state exemptions. It is best to consult with an experienced attorney who will advise you if you’ll be able to fully exempt, and thus keep, your assets if you want to pursue Chapter 7 bankruptcy.

Misconception #3: You can only file for Chapter 7 once in your lifetime.

There are many debtors who have filed multiple bankruptcies. If you filed a Chapter 7 previously and received a discharge then you’ll need to wait until eight (8) years have passed since the previous filing date before you can file another Chapter 7. If you filed a Chapter 13 previously and received a discharge then you’ll need to wait until six (6) years have passed since that filing date before you can file a Chapter 7 case.

Misconception #4: You cannot discharge tax debts in a Chapter 7 bankruptcy.

Many people believe they cannot discharge income taxes in a Chapter 7 bankruptcy. There are some taxes that cannot be discharged, but income taxes that meet the criteria for discharge can be discharged.

In general, the criteria for discharge of income taxes is (a) the due date for the taxes (including if there was an extension) must be at least three years ago, (b) there must be at least two years since the debtor filed the tax returns (i.e., it cannot be a return that was filed on the debtor’s behalf by the state or federal tax authorities), and (3) there must be at least 240 days since the income taxes were assessed.

The assessment date is often the date the tax returns were filed, but if the tax authorities (IRS or state) look at the taxes later and determine that more taxes are owed than what was on the return then that date will be the assessment date. It might make sense to visit with your accountant to determine whether the criteria have been met. There is also the general requirement that the debtor has not filed a fraudulent tax return.

If you’re interested in filing for Chapter 7 bankruptcy please set an appointment with one of our experienced attorneys who will advise you of your options or visit us at At W M LAW, we are “Here to Help”.

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Jeffrey L. Wagoner


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