Top Bankruptcy Myths and How to Avoid Them


  1. Filing for bankruptcy does not “stop” a foreclosure.

False.  Not only does filing for a Ch. 13 bankruptcy stop a foreclosure, it gives you an opportunity to strip off a second deed of trust ( 2nd mortgage), if the value of the house does not exceed the first deed of trust (1st mortgage), and pay back the arrears (missed payments) and penalties on the first deed of trust  (1st mortgage) over 5 years.

  1. You need to be broke to file bankruptcy.

False.  If you see financial hardship in your future, proper planning early in the process will help you avoid the difficulties and stress of dealing with law suits, garnishments, judgments, and the harassment of collection agencies.

  1. You need to be unemployed to file for bankruptcy.

Not true.  You need income to meet living expenses whether in or out of bankruptcy.  One of the purposes of the bankruptcy process is to give you a fresh start and having a source of income is an important part of that process.

  1. If I go into bankruptcy, my credit score will be ruined for 10 years,

Wrong.  Your credit score is an important asset and there are many cases where filing a bankruptcy will have little effect on your credit score and those effects may be temporary.  Many people find that within 2 years after filing, their credit score improves to a good or excellent level.

Things you hear in the media and on the street make you believe that just because a bankruptcy is listed on your credit report for 10 years, you will not be able to get credit during that time.  This is not true.

  1. Avoiding bankruptcy with a debt settlement company is a strategy to preserve my credit score.

Not True. Working with a debt settlement company will usually hurt your credit score as your past due balances often increase during the process, and the debt settlement itself results in companies “writing-off” a portion of your account, both of which have a negative impact on your credit score.

Importantly, many people end up getting sued by the credit companies anyway and then have to turn to the bankruptcy process, but only after wasting thousands of dollars on debt settlement and living through the stress of negotiating with the credit companies.

  1. It is better to cash in a retirement account than go into bankruptcy

 Wrong!  These funds are protected in bankruptcy. and you will face taxes and penalties if you access the money.  Speak with a bankruptcy attorney before using any of these funds as you do not want to unnecessarily waste protected retirement funds.

  1. If I file bankruptcy, everyone will know about it

Not true.  While Bankruptcy Court records are public, not many people regularly read the new bankruptcy filing notices. In fact, with the amount of bankruptcy filings across the nation now at records levels, you likely know somebody who has filed for bankruptcy in the last year and do not know about it.

  1. I will lose my apartment if I file for bankruptcy.

False.  Most standard lease contracts contain a clause in the contract that say you will be in default of the contract upon the filing of a bankruptcy.  These are called “ipso facto” clauses and are unenforceable!  You will not lose your apartment simply by filing for bankruptcy.  There are important steps you must take if you are behind in your rent when you file, but your landlord will not be able to evict you simply by filing for bankruptcy protection if you take the proper steps.

  1. You are a failure if you file for bankruptcy.

False.There are many individual circumstances that can lead us each to financial hardship.  Health problems, job loss, and family problems are all commonly cited issues that can lead to unexpected financial problems.  Many successful people have been bankrupt before becoming wildly successful, including H.J. Heintz (of Heintz ketchup), Abraham Lincoln, Thomas Jefferson (before and after his presidency), William McKinley (while he was governor of Ohio before winning the Presidency ) and Henry Ford.

10.  You can’t afford a bankruptcy attorney.

False.  There are many ways you and your bankruptcy attorney can work out payment issues.  For example, in a Chapter 13, most of your payments to your attorney can be made through your Ch. 13 plan at no additional cost to you, depending on your individual circumstances.

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Best Way to Avoid Myths

There is not a specific person, website, article, or book that is worth naming, but there are some general concepts to consider when reading information:

  1. Consider the incentives of the author or speaker:  The least biased source for information about bankruptcy is the Bankruptcy Court itself and the U.S. Bankruptcy Code.  The court has published helpful information about the bankruptcy process at

Additionally court opinions in the Eastern District of Virginia can be found at

  1. Question the use of absolutes (“always….” and “never…”)

Like all areas of law, there are always exceptions and important ramifications to be considered that are not always apparent.  It is important to discuss your individual situation with a bankruptcy attorney who can review your individual situation and discuss the options available to you to determine the best course of action for you and your family.

  1. Be skeptical of anything you hear that does not come from a judge or your bankruptcy attorney.

Bankruptcy is complicated.  Many sources attempt to distill a complicated concept or idea down to a “one-liner.”  Bankruptcy is an intricate, complicated area of law that requires in depth knowledge and analysis that a journalist, formbook, or other commentator does not have the experience or time to perform.

  1. Question any source that promises something too good to be true. 

Any source that promises you something for nothing, contains phony promises or contains unrealistic guarantees needs to be questioned.  You do not have a “right to modify your mortgage,”  you do not have a “right to be debt free;” what you do have is the abilityto discharge or modify that debt in a bankruptcy, but only by speaking with an attorney can you determine the extent you are able to do so.  You must be skeptical of anybody or anything that promises otherwise.

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