CORRECTION!! This blog contained out of date information and has been corrected. The exemptions for homestead in Colorado have been increased and currently are $75,000 (or $105,000 if the home is occupied by a debtor who is disabled or over 60 years old).
There are situations where unexpected financial problems can cause disastrous effects. It can include unexpected medical expenses, a dramatic increase in living expenses, or an unexpected job loss or layoff. It is often in these dire circumstances where bankruptcy makes the most sense.
Bankruptcy has some negative connotations, which keeps people from using its benefits. Debunking myths associated with bankruptcy is extremely helpful for those who are considering filing for bankruptcy.
Myth #1: Filing for bankruptcy means you are a poor money manager.
Bankruptcy is a benefit created by law for the “honest but unfortunate debtor.” Using its provisions should not be associated with failure; it is a means for hardworking Americans to get back on their feet again when disaster strikes. While some debtors in bankruptcy are there because they made some poor financial choices, many use the system because unexpected expenses have simply overcome them. Planning for an economic downturn or injuries is nearly impossible, so bankruptcy provides some relief.
Myth #2: You will lose everything in bankruptcy.
Many people assume that if you file for bankruptcy, you will have to sell literally everything you currently own. This is usually not the case because the law is set up so you can keep your essentials. For example, most people will be able to claim all or a portion of their home as “exempt” from bankruptcy. In Colorado, the real property limit for the exemption is $75,000 (or $105,000 if the home is occupied by a debtor who is disabled or over 60 years old). Life insurance, various other types of insurance, and many forms of pensions are also exempt in Colorado. You also have exemptions for necessities like clothing, household goods, and vehicles.
Myth #3: Every debt will disappear after bankruptcy.
Unfortunately, bankruptcy will not give you relief for every type of debt. There are special provisions that will not allow you to discharge certain debts. For example, child support obligations are not dischargeable, and it is extremely difficult to discharge student loan debt. Most consumer debts, however, will be discharged through bankruptcy.
Myth #4: You can never get a loan after filing for bankruptcy.
Filing for bankruptcy does harm your credit, but most people already have poor credit by the time they decide they need to file for bankruptcy because they have been unable to keep up with their financial obligations. It will take some time to restore your credit, but lenders will work with you. You may have to deal with higher interest rate loans while you work through this process, but you can certainly still get loans. A bankruptcy will often remain on your credit report for up to ten years, but you can increase your credit score overall in much less time in many situations. Saving as much as possible for emergencies will be important after a bankruptcy because getting credit for unexpected expenses may be a challenge.
Myth #5: Only those who have nothing left are eligible for bankruptcy.
While it is true that many filers wait until they have used all of their resources to file for bankruptcy, this use of funds is by no means a requirement to file for bankruptcy. Even if you do not qualify for Chapter 7 bankruptcy, you may be able to arrange a payment plan based bankruptcy in Chapter 13 to allow you to take control of your debts over time.
Talking to an attorney is the best way to determine whether bankruptcy is a good option for you. Contact the law office of Duncan Legal PC to set up a consultation for an evaluation of your current financial situation.