• David LaFollette

Why Bankruptcy Is Not That Scary

Here are a few reasons why you shouldn't be afraid of bankruptcy, and why it's generally not as bad or as scary as you might think.

Bankruptcy: Why are we so afraid?

The first impression of Bankruptcy that most people have usually involves a man wearing a barrel because the government has taken everything he had. While equal parts depressing and comical, it is not a true depiction of bankruptcy. Bankruptcy is more correctly called “Bankruptcy Protection” because the purpose is actually to protect you from creditors. It is there to provide you with a fresh start. Debts get discharged, and creditors are stopped from trying to collect from you by something called a stay. Even still, people have reasonable fears of Bankruptcy.


Your debts get discharged!

Discharge means that your debts are wiped out and once you receive your discharge, you no longer have to pay any of the discharged debts. What’s so bad about that? There are some debts that cannot be discharged or are very difficult to do so, however. Student loans and taxes are the most common that do not get discharged. Even still, student loans might be dischargeable in some very specific, rare, situations, and some old tax debts can be discharged.


You don’t have to lose your stuff!

First, if you are filing Chapter 13, you do not lose any assets. The only bankruptcy where you would lose assets is Chapter 7 and that is what most people think of. The majority of Bankruptcy cases, however, are no-asset cases. “No-asset” means that the person has nothing of value that the trustee can take, and therefore you lose nothing. This does not mean that the debtor “has no stuff,” but instead means that they used the built-in bankruptcy exemptions to protect what stuff they had.


What are Exemptions?

Generally, you are allowed to protect certain amounts of certain types of assets. These protections are usually in the form of an exemption. For example, there are exemptions for houses, cars, furniture, clothes, even jewelry. This is not to say that the exemption always protects 100% of the asset, but it can. In Connecticut, the filer can choose between Federal and Connecticut exemptions based on which set will benefit him/her the most, as they are not exactly the same.


Example 1: If you own a car currently worth $3,500, exemptions will let you exempt the entire amount and keep the car. If the car was worth more than the exemption, it is possible to cover the rest by using a “wild card” exemption that may be available to you.


If there are not enough exemptions, there are still other methods that may allow you to keep your assets such as reaffirmation. Also you can use third party companies that will allow you to redeem and pay based on the market value of your car instead of the ongoing payments based on new-car value.


Your credit will not be destroyed!

When you file bankruptcy, often your credit score will go up one year after discharge. This is because your previous debts are discharged, meaning you do not owe them anymore (they’re gone). Additionally, you have likely been making whatever payments you have on time now that the lion’s share of stress is removed.


Any questions or comments, please contact us!


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