By Ryan C. Wood
There is way too much fake news out there about bankruptcy. Look, I know bankruptcy is not looked at in the best light for many reasons. I am not going to try and convince anyone that believes bankruptcy is wrong. Most people will never understand until something happens that is completely out of their control and now they are looking at filing for bankruptcy protection. Bankruptcy is the law and absolutely necessary in our economic system.
So, what is the single most misunderstood part of bankruptcy? What is the most common “Fake News” I hear out there about filing bankruptcy? A little information about me first so you give my opinion some weight. I have been involved in the bankruptcy industry before I graduated law school. I did not jump on this band wagon during the mortgage meltdown like many other attorneys. I intended to be a bankruptcy attorney during law school and I have not been employed in any other area of law. I worked for a creditor’s right law firm. I worked for a debtor’s rights law firm. I worked for a Chapter 13 Trustee, David Burchard, for the San Francisco and Santa Rosa Divisions of the Bankruptcy Court for the Northern District of California. I then started my own practice to even better serve those in need of debt relief. I have touched easily over 5,000 bankruptcy cases. I have talked to thousands of potential clients and those that chose to file bankruptcy. The single most misunderstood part of bankruptcy is the relationship between assets and exemptions that protect the bankruptcy filers stuff and/or assets.
The Most Disturbing Fake News Is: You Will Not Lose All Of Your Stuff When Filing Bankruptcy
THIS IS NOT TRUE AT ALL. This is probably the most troubling part of being a bankruptcy attorney. I have to explain over and over again that you will not be left penniless and barefoot in the middle of the street after filing for bankruptcy under any chapter of the Bankruptcy Code. We all need a certain minimum stuff to survive in this world. Bankruptcy is designed to give you a fresh start, but not a head start either.
While bankruptcy is governed by Federal Law and created by Congress, each state can create their own exemptions to protect peoples stuff from those they owe money to. A bankruptcy filer in certain states can choose the state law exemptions or federal exemptions to protect their stuff. In California you must use the state law exemptions pursuant to California Civil Code 703.14 or 704. The theory behind protecting a certain amount of someone’s assets is it does no human on Earth any good if another human is stripped of all of their worldly possessions when filing bankruptcy. At the same time common sense should tell you that if you own a paid in full $60,000 Tesla you cannot get rid of $30,000 in credit card debt while still keeping the paid in full $60,000 Tesla. You would be right. Under California exemptions we get either (CCP703.14) $5,350 or (CCP704) $3,050 to protect your vehicles. I am not going to go into the differences between California’s two set of exemptions, the 703 or 704’s. Just know that there are two choices and one is probably more beneficial to you than the other. It all depends upon your assets.
So what are the problem assets? As the example provides above vehicles can have high values sometimes or if multiple vehicles are owned it can be difficult to protect all of them depending upon the vehicles value of course. Home equity in the Bay Area is now a huge issue again given how much home values have increased over the last 8 years. We can only protect so much equity in a home. For more information about how much California exemptions protect in home equity look up the homestead exemptions for California. During your consultation with a bankruptcy attorney you will discuss exemptions in much detail.
Filing Bankruptcy Is Not Financially Devastating Like The Media Or Your Friends Think
The other most common “Fake News” I hear is how financially devastating filing for bankruptcy protection is. This is simply not true at all. Most of the financial devastation already took place before I ever speak to someone. All the missed payments, late payments or repossession/foreclosure has already happened or will soon happen regardless of filing for bankruptcy protection or not. Four or five months of missed or late payments can tank a credit score. The damage is done. SO FILING FOR BANKRUPTCY DOES NOT LOWER YOUR CREDIT SCORE. THE NEGATIVE EVENTS LEADING UP TO THE BANKRUPTCY CASE BEING FILED LOWERS YOUR CREDIT SCORE.
What the bankruptcy does is eliminate the debts you are struggling to pay each month so that you can make regular on-time payments for the necessities of life. Then once you make regular on-time payments on everything your credit score will increase. How can you rebuild your credit while still making late payments or missing a payment on one card and not another? It really does no good to rob Peter to pay Paul. That is a vicious cycle of debt and increased interest payments that will never end.
You can buy a house. You can buy a car. You can continue to live life like you are now. It is just without all of the debt that keeps you from getting ahead in this very short life we have. You do not have to struggle each month. That is no way to live and you do not have to. Educate yourself about bankruptcy and other tools to help you get ahead in life.