Popular Misconceptions and Myths About Bankruptcy

My colleague Susanne Robicsek answered a commonly asked question in her post on this blog entitled “Does Changing Your Name Get You Out of Debt?” Susanne’s post got me thinking about other myths and half truths that pop up year after year. Here are my top 6:

Can you change your name and get out of debt – see Susanne’s post

Can you form a corporation, obtain a tax ID number then incur credit under the tax ID number?

Answer: You can form a corporation but most lenders will not give a new corporation credit. Further, if you create a corporate entity specifically for the purpose of obtaining personal credit, the credit lender will likely pierce the corporate protection and pursue a fraud civil action against you.

Can you sell your paid off car/house/boat/stereo to your brother for a dollar?

Answer: No. All transfers of this type within the two years preceding the bankruptcy must be revealed and you will likely be questioned at your Section 341 hearing about asset ownership and transfers over the past five years. This type of transfer is considered a “fraudulent transfer” for bankruptcy purposes and can be reversed, and can also result in a denial of your discharge.

Your parent died and left you land/jewelry/vehicles/cash and the estate is not yet closed or probated. Can you refuse to accept what was left to you and allow your siblings to keep these items and therefore not include them in your bankruptcy?

Answer: The relevant state law governing the disposition of the estate should be consulted, but in general, a repudiation of property left to you in a will should not have an improper purpose. If you do repudiate that fact should be included in your bankruptcy and will likely trigger your trustee to investigate and pursue the assets on behalf of the estate.

When you file a Chapter 13, are you required to make a trustee payment prior to confirmation?

Answer: Yes. The time between the filing of your Chapter 13 case and its confirmation are a type of probation period to show that you have the ability to fulfill your plan obligations. Your plan funding obligation starts immediately. If you are not fully funded by confirmation your plan will likely not be confirmed.

When you file a Chapter 13 bankruptcy, are you required to make a mortgage payment prior to confirmation?

Answer: In districts where you pay your mortgage directly, you must be current with your mortgage lender at confirmation. If your mortgage is delinquent your case will most likely not be confirmed.

I don’t want to include my car payment/mortgage payment/selected credit card in my bankruptcy – is that OK?

Answer: No, it is not ok. The Bankruptcy Code requires that you include all of your debts in a petition and that similarly situated creditors be treated equally in your case. When you sign your petition under penalty of perjury you are swearing that you have included all debts and assets. You cannot selectively leave out one or more creditors.