The majority of anxiety clients face in deciding whether to file bankruptcy is often from lack of information or incorrect information from other people who do not understand Colorado bankruptcy. These people perpetuate stereotypes that put you in a worse position and create a barrier to your fresh start and financial freedom.
A quick initial consultation with a Colorado bankruptcy attorney can resolve most of your questions and allow you to make an informed decision. The attorney can explain Colorado’s local procedures and bankruptcy rules. In addition, they can help you explore alternatives to bankruptcy including debt settlement.
To help educate our clients on common bankruptcy myths, we have created this web page.
Bankruptcy Myth #1: I Will Lose My Assets If I File Bankruptcy
Most cases do not result in losing assets. One of your attorney’s responsibilities in your bankruptcy case is to review your assets and determine whether they are protected under Colorado exemption laws.
Protected assets cannot be taken by creditors or the bankruptcy trustee. The majority of assets, such as your car, home, and furniture are protected. Certain assets are not protected, such as firearms or tax refunds.
If you have unprotected assets your bankruptcy attorney can help you protect the value of these assets using bankruptcy exemption planning. Bankruptcy exemption planning allows you to legally move assets around, so they are protected.
Bankruptcy planning with your assets should not be done without the aid of a Colorado bankruptcy attorney. If done without proper legal advice you could end up losing assets needlessly.
Bankruptcy Myth #2: I Will Not Be Able to Purchase or Refinance a Home If I File Bankruptcy
This is one of the greatest concerns of our clients. The irony is that by the time you meet with an attorney you are likely so deep in debt that you generally would not be approved for a mortgage or refinance anyway. Furthermore, it would take years to get the debt under control so that you would qualify for a new loan.
It is even worse if you have fallen behind and you are not paying your debts. Missing payments result in negative credit marks being added to your credit report each month. Each negative mark becomes its own piece of credit history and generally takes 2 – 10 years before it drops off your credit report.
The more negative marks you create the harder it is to rebuild your credit. Filing bankruptcy stops further negative marks on your credit report. It wipes out dischargeable debts and gives you a fresh start. From the moment you file bankruptcy you can begin rebuilding credit and will receive offers in the mail from creditors that primarily lend to people who recently filed.
Additionally, the lending requirements for FHA, VA, HUD, and others generally allow the purchase of a new home or refinance of an existing residence within 2-3 years of filing bankruptcy. This is as long as you have no further issues with repaying debt after your case is filed.
Waiting 2-3 years is significantly faster for most people than trying to pay off debt or recuperate from the continually negative credit information hitting their credit report each month.
Bankruptcy Myth #3: I Will Not Be Able to Modify my Mortgage If I File for Bankruptcy
Bankruptcy reduces your expenses often making mortgage modification possible and more appealing to the bank. By filing bankruptcy you will have eliminated your dischargeable debts, given yourself the option to replace expensive cars with new cheaper ones, and allowed yourself to reorganize finances so you can afford a mortgage modification.
In addition, by filing bankruptcy you may eliminate your obligation to pay the mortgage and can walk away from your home without repercussion. It is in the bank’s best interest to work with you when your finances are in a better place and you are no longer obligated to pay them.
Bankruptcy Myth #4: I Will Lose My Job If I File Bankruptcy
It is illegal for an employer to fire you for filing bankruptcy. In addition, you may be at greater risk of losing employment due to debt problems including collectors constantly calling you at work and lawsuits being filed against you that may result in garnishment by your employer.
This is especially true if you are required to have a security clearance. For example, military clients may be advised by their superior officer to file bankruptcy in order to keep their clearance. By having too much debt they are susceptible to bribes and are in a compromised position. Bankruptcy resolves this.
Also, in certain fields, you would not be able to get a job with debt problems, such as banking or securities, and bankruptcy eliminates debts and may place you in a better position for this type of employment.
Although bankruptcy may need to be explained to future employers, you must take into account the alternative, which is ongoing poor credit and a history that shows a continuing poor financial situation.
Bankruptcy Myth #5: I Cannot Discharge my IRS Tax Debt
There is a common myth that you cannot get rid of tax debt in bankruptcy. This is not true. However, there are very specific rules that must be met in order to eliminate your tax debts in bankruptcy.
The general rules are as follows:
- The tax debt must be more than 3 years old,
- The tax return must have been filed at least 2 years prior to the bankruptcy filing; and
- You cannot have been found guilty of fraud or tax evasion for the dischargeable tax years.
Tax situations can be more complicated than the basic rules mentioned above. It is advisable to seek the counsel of an experienced bankruptcy tax attorney to make sure you do not lose out on the advantages bankruptcy may provide in eliminating taxes.
Bankruptcy Myth #6: I Cannot Discharge My Student Loan Debts
Similar to the myth that you cannot discharge your taxes is the myth that you cannot discharge your student loans. Unlike discharging taxes, when you try to discharge student loans you also must file a Motion with the bankruptcy court and prove your case.
To prove your case you generally must show that you are too physically or mentally impaired to pay back your student loans. Alternatively, you may also be able to argue that the loans are burdensome and such a hardship that it would be impossible for you to pay them back.
Recent cases where people are suffering from depression or disability, as substantiated by a doctor, have resulted in all or a portion of a person’s student loan debt being discharged.
Bankruptcy Myth #7: I Make Too Much Money to File Bankruptcy
Anyone can file a bankruptcy at any income level. However, the Chapter of bankruptcy may be determined by your income.
This does not mean people with high incomes do not qualify for Chapter 7 bankruptcy. There are people who qualify for Chapter 7 bankruptcy that make well over $100,000 a year or even more.
For example, a business owner with significant business debts may qualify for an exception from the income tests applied in a Chapter 7 bankruptcy. This exception along with proper review and advice on your expenses can result in receiving a Chapter 7 bankruptcy instead of a payment plan bankruptcy.
Work with an experienced bankruptcy attorney to determine what exceptions may apply in your case. Otherwise, you risk having to needlessly repay debts because your attorney does not know the rules. Experience counts and saves you money and further hardship.
Bankruptcy Myth #8: Any Attorney Can Help Me File a Bankruptcy
Not just any attorney can capably handle a bankruptcy. Bankruptcy law is generally an elective class in law school and attorneys are not formally trained on anything but the theory of bankruptcy in their studies.
To truly understand how to handle a Colorado bankruptcy your attorney should be experienced in Colorado bankruptcy law and procedure or have an experienced senior attorney available to help on your case as needed.
Without an experienced attorney prepared to handle the nuances of Colorado bankruptcy law, you could lose assets or end up in a payment plan bankruptcy when you could have filed a Chapter 7.
An experienced attorney will make the process easier, reduce your stress with their knowledge, and help make your experience as efficient and effective as possible.
Taking the Next Step Towards Bankruptcy
Are you ready to find out how bankruptcy may affect your life and get an accurate and personalized bankruptcy review? Then the next step is to meet with a Colorado bankruptcy attorney at Cohen & Cohen to review your matter and protect your interests.
Our bankruptcy attorneys provide professional bankruptcy representation and have the experience to handle your matter.
Speak to the Colorado bankruptcy attorneys at Cohen & Cohen to see how our experience helping individuals and business owners file for bankruptcy can help you.
To schedule your initial consultation at our convenient central Denver location call 303-933-4529.
* Note, we are not your lawyer until you sign a fee agreement with us. Do not take legal actions based on this content! Before continuing, please review the following disclaimer.
About the Author: Robertson Cohen
Rob Cohen is a Managing Partner of Cohen & Cohen, P.C., serving clients in Colorado and Wyoming. He’s a Chapter 7 Bankruptcy Panel Trustee, certified mediator, and has administered over 8,000 Chapter 7 bankruptcy estates.