10 Bankruptcy Misunderstandings
1. You Will Lose Your Home
In Arizona, a person or married couple is allowed to protect the first $150,000.00 equity in their personal residence from creditors. This rule applies in bankruptcy as well.For example, if you own a home, you live in it, and it is worth $200,000.00 and your only mortgage is $50,000.00, you have $150,000.00 in equity. That equity is safe.
What if you don't make your mortgage payment? That's a different story.
2. Taxes Can't Be Discharged in Bankruptcy
Income tax debt is dischargeable in bankruptcy if it meets certain criteria. It is the most common type of tax debt dealt with in bankruptcy. Certain other tax debts are as well like:
a. The non-trust fund portion of the self employed payroll tax. If you own a small business and run it as a sole proprietor using your social security number and you have employees… you must withhold their income taxes, their portion of social security and medicare taxes, and you must match a certain portion of that payroll tax and send it all in. (6.2% social security tax and 1.45% medicare tax) If you don't, you will owe the entire amount. The employee portion is trust fund i.e. it is never dischargeable in bankruptcy, but the employer portion may be dischargeable in bankruptcy if:
– More than 3 years between the date the 941 return was due and the date the bankruptcy is filed
– More than two years have elapsed between the date the returns were filed and the bankruptcy filing and;
– No willful evasion of the obligation to pay the tax occurred.
b. Arizona Transaction Privilege Tax: The Arizona Transaction Privilege Tax is a sales tax but it isn't collected from the customer. It is tax on the privilege of doing business paid based on a percentage of sales. It is not trust fund. If it meets criteria similar to the criteria mentioned above under Non Trust Portion of Payroll Tax, it may also be discharged in Bankruptcy.
c. Tax Penalty: The IRS hits you with all kinds of penalties related to income tax. The most common are failure to file a tax return on time and failure to pay the debt. These two penalties really add up and with interest can actually double the debt over time. In a chapter 7 bankruptcy these two common penalties are dischargeable if they meet the three basic date rules.
– 3 years between due date of return and filing date of bankruptcy
– 2 years between actual filing date and filing date of bankruptcy
– 240 days between assessment date and bankruptcy filing date
What if the underlying debt didn't meet one of these rules? The debt and the penalty would survive the bankruptcy. In a chapter 13 bankruptcy, the penalty and the interest on the penalty is treated as non priority dischargeable debt no matter it's age.
3. You Get to Choose Which Creditors to “include”
This is a very common misconception and a dangerous one. The failure to list a creditor in the bankruptcy schedules is a serious matter. One purpose of the bankruptcy code is to treat all similarly situated creditors alike. When you leave one out and pay it, the others are getting shortchanged. When you file bankruptcy make sure and tell the attorney every debt you have.
4. An Agreement that Says the Debt Is Non Dischargeable Makes the Debt Non Dischargeable
For the most part these types of clauses in contracts are not enforceable and are just a tactic used by creditors to scare them away from bankruptcy.
The bankruptcy filing severs obligations with most creditors. It severs the obligation that was the original result of the contract you signed that contained the non-discharge language.
5. You Can Lose Your Job if You File for Bankruptcy
There is a law for most everything and there is a law for this as well. That law says that if you can prove that the employer fired you because you filed for bankruptcy, the employee can sue the employer. However, if you are looking for a job, that new potential employer may be able to use the bankruptcy filing as a factor in deciding whether to hire you.
6. You Have to Be Really Broke to File for Bankruptcy
The bankruptcy code doesn't have a “really, really broke” provision. It does allow you to protect certain assets so that you have a place to live, a chair to sit on, a car to drive and some retirement money. It does this so that you don't file for bankruptcy and than become a “ward” of the state. In Arizona the most common assets that are safe from the Bankruptcy Trustee and most of your creditors outside of Bankruptcy are:
Home – Equity to 150,000.00
Tax Qualified Retirement Accounts
Certain Whole Life Insurance Policy Cash Value Amounts
1 Car per person up to $6000.00 in equity
Most household Furniture
Clothing, Wedding Rings, Gun
Six Months of Food Fuel and Provisions
Also, many people file for bankruptcy and have steady and “good” incomes. If the majority of all your debt is tax or business debt, it may not matter what you earn, you may still qualify to file a chapter 7 bankruptcy.
7. Your Employer Will Be Notified when You File for Bankruptcy
Filing for Bankruptcy doesn't carry with it the requirement that you notify your employer. Bankruptcy filings are placed in the public record, most employers don't go searching the public bankruptcy record on a regular basis.
8. My Credit Will Be Terrible for Ten Years
Most bankruptcy filers see some improvement after a relatively short period of time 1 to 2 years, especially if they apply some effort after the case is over to rebuild the credit score. We take the position that if the deciding factor in choosing to file bankruptcy is just your credit score hit, you really should re-think the decision to file anyway. Your situation may not be serious enough to warrant using bankruptcy.
9. I Can Just Sell the My Boat, House, Fancy Car to My Cousin for 1 Dollar and Protect It from Being Lost to The Bankruptcy Trustee
Any transfer for less than market value made within 2 years prior to the bankruptcy case has to be disclosed to the court. It is considered fraud for bankruptcy purposes and can be reversed. It can also end up causing your to lose your bankruptcy discharge. There are other ways to deal with non-exempt assets that may be more beneficial.
10. I Have to File Bankruptcy with My Spouse
You may be able to file alone and in Arizona still give your marital community the benefit of the bankruptcy discharge i.e. protection from creditors. It is called the community discharge and you will need to talk to an experienced bankruptcy lawyer about it.