Myths and Facts about filing Bankruptcy in Michigan.

For people filing for Bankruptcy in Michigan, or any other place in this country, there is an old saying – “A little knowledge may be a dangerous thing.” This is true with respect to bankruptcy proceedings. Far too often, people determine for themselves that they may or may not qualify for bankruptcy protection. Others jump to the conclusion that if they file for bankruptcy, they will lose their possessions, retirement benefits, homes or cars.  There are several myths about filing for bankruptcy protection:

Will Bankruptcy ruin my credit forever?

(1) “My credit will be ruined forever!” This is a common remark made by many which is just not true. Credit is not just a score or number. Many factors are considered by lenders when deciding to grant or deny a loan. One factor that is almost always considered is the borrower’s debt to income ratio. In other words, how much debt one has versus their ability to pay that debt.

Having too much debt and not enough income to pay that debt in a reasonable time lessens one’s ability to borrow. Lenders are reluctant to loan money when the borrower’s ability to repay that debt is hindered by other debts. However, a bankruptcy filer who receives a discharge of their debts will be in a greater position to borrow than one who did not. When a person receives a discharge after filing a Chapter 7 or Chapter 13 bankruptcy, the filer is relieved of his or her obligation to pay their debts. In most instances, a filer has no more debts other than the home or car that they intended on keeping. So their ability to pay on new loans increases and so does a lender’s willingness to grant them a loan.

Do I have to give up my assets if I file for Bankruptcy?

(2) “If I file, I will have to give up my assets!” There is no requirement when filing bankruptcy that your liquidate or give up your assets to get out of debt. The bankruptcy laws were designed to allow a person to keep typical, ordinary assets, such as homes, cars, jewelry, retirement benefits and other items of personal property. A person interested in filing for bankruptcy should seek the professional advice of a bankruptcy attorney.

(3) “I will have to give up my house and car!” Bankruptcy or no bankruptcy, you do not have to give up your home or car if you can afford to pay for them. In most instances, the value of a home or car is usually less than the amount owed to the creditor who financed its purchase. There is typically little or no equity in these assets. When there is no equity in the property, there is nothing for a Chapter 7 Trustee to take. And in situations where there is equity, you can typically claim you allowances (called “exemptions”) to cover any equity that may exist. Only a qualified bankruptcy attorney should make a determination on what is, and what is not, covered by your allowances.

Is the debt that is discharged in Bankruptcy taxable?

(4) “I will have to pay income tax on the discharged debt!” If you had to pay taxes on debts discharged in bankruptcy, then what good would a bankruptcy be? Debts discharged in bankruptcy are not considered income, and thus, not taxable. The idea behind getting a discharge of debts in bankruptcy was to give the filer a fresh start. In order to accomplish this task, the law provides that cancellation of debts though bankruptcy is not taxable as it is not income.