Chapter 7 Bankruptcy: Five Common Misconceptions
1. Chapter 7 bankruptcy will ruin my credit for 7 years
It is true that the bankruptcy is reported for up to 7 years after you file your bankruptcy. However, it does not negatively affect you for that long. At the end of your Chapter 7 bankruptcy, you will be debt free (with some exceptions like student loans), which positively impacts your credit. I’ve had clients finance car and home purchases without issue after their bankruptcy cases.
2. I’m going to lose my house and car
This almost never occurs . In Nebraska, you can protect and keep your home as long as you are current on payments when you file and your home has $60,000 or less in equity.
As for your car, you can retain and keep it, if you’re current on payments and your vehicle has less than $10,000 in equity. This is because in Nebraska, you can use the vehicle exemption, which is $5,000, and the wild card exemption, which is $5,000, to protect one vehicle. For a couple filing the Chapter 7 bankruptcy jointly, those amounts can be doubled.
3. Filing bankruptcy is only for people that are behind on making payments
You don’t have to be behind to file bankruptcy. Actually, the best time to look into whether to file is prior to or soon after defaulting on payments.
Example: Your monthly minimum payments are $1,000. You were able to keep up with the payments until your former girlfriend decided she was going to move out. With less income coming into your household, you won’t be able to make next month’s credit card payments.
4. I make too much money to file Chapter 7 bankruptcy
The bankruptcy law includes something called the Means Test, which takes an average of your monthly income for the last six (6) months from all sources (excluding Social Security income), annualizes it (multiplies by 12), and compares it to the median income for your household size. If you’re below the median, you are good to go with a Chapter 7 bankruptcy. If you are above median, you usually are not. However, the Means Test has a 2nd step if you’re above median income that takes into account qualified and allowed expenses (i.e. child support payments, taxes, child care, etc.). Sometimes you may still qualify for a Chapter 7 bankruptcy after this 2nd step even though initially your income was “too high”.
5. If I file, my spouse has to file bankruptcy with me
You are allowed to file a bankruptcy without your spouse. Sometimes this makes a lot of sense. Two common scenarios are when your debt was incurred prior to marriage or you have business-related debt that is only in your name. If you are married and decide to file Chapter 7 bankruptcy without your spouse, you may still have to provide your spouse’s income and assets. However, your spouse’s identifying information, such as Social Security number and name do not have to be disclosed.
There is a lot of misinformation and fear on the internet regarding Chapter 7 bankruptcy, much of which is false and keeps people from using a viable solution to address their debts and move forward.
Learn more about Chapter 7 bankruptcy.