The Checkout

Bankruptcy Confusion

The new bankruptcy law, passed just three months ago, has created a lot of confusion. Meanwhile, a lot of age-old myths about bankruptcy continue. For example, there's the perception that bankruptcy will give consumers a chance to start over with their credit. That is not necessarily the case--bankruptcy stays on a credit report for seven to 10 years--impacting a consumer's credit profile. That, in turn, can lead to higher interest rates and perhaps even some difficulties in getting a job.

Another myth: All debts can be discharged in bankruptcy. The truth: Certain debts such as child support, student loans and most taxes may not be forgiven.

Experian, one of the nation's three largest credit-reporting firms, has sought to correct the top 10 myths about bankruptcy. Bankrate.com, a handy Web site that provides free rate information to consumers on more than 300 financial products, including mortgages, credit cards, and car loans, has an even more detailed explanation about the myths.

Meanwhile, the new law that makes it harder for debtors to completely wipe out their debts isn't working as its supporters had envisioned--at least not so far. Supporters had hoped the requirement that debtors first consult credit counselors before filing for bankruptcy would steer consumers away from the courts and into debt-repayment plans. But that's not what's happening. For details, read my story in this morning's Post.

By  |  January 17, 2006; 6:45 AM ET Credit Issues
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Comments

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For those filing bankruptcy, either the old way or the new, God help you. It's funny how murder is kinda shrugged off in this country. Illegal drugs are, well, everybody does them. Illegal immigration, wait a minute now, those people need help! But bankruptcy, why you low life slacker, you're just a gutless heathen loser trying to rip off the system!! But, I guess, what can you expect when you mess with a country's religion.

Posted by: Whizbang | January 17, 2006 10:32 AM

Caroline,
Your article "Bankruptcy Counseling Law Doesn't Deter Filings" was interesting but not suprising. However, and lets assume MMI's numbers are accurate and they waived 60% of the upfront "donation" since they are non profit. MMI stands to make $298,000 if they charged $50 per interview and that doesn't include the next fee they stand to receive for financial budget management course that a debtor has to take as a condition to receive a discharge. Lets assume they add another "donation" fee of $50 for the 14,238 that they could not help on the first go-around. That is an additional $712,000 in revenue for MMI.

Not bad for a few weeks work, but at who's expense?

Posted by: Raymond P. Bell, Jr. | January 17, 2006 11:30 AM

Have been paying monthly debts through Take Charge America for nearly three and half years now, via a referral by MBNA. Their "sales" person said that many of the credit grantors would acknowledge payments from TCA as on time and thus our credit score would begin improving within six months time. Need I say that the process was comparable to filing for bankruptcy in terms of our credit rating actually being further and more dramatically injured, than when we were trudging along on our own. The set up of the process was extremely time intensive, and mis-leading in terms of what TCA could do. Essentially, one pays an up front fee, a monthly fee and TCA takes your money two weeks in advance of remitting it to the seperate companies, who in turn can take up to five business days to post it to your account. There is value to their service, but anyone who thinks that they have angel wings is unfortunately mis-informed. It's just another way for enterprising capitalists to bilk the "already strapped" for more of their non-existent income. It's no wonder that consumers are only going through the motions of attaining the certificate for the purpose of escaping their obligations. I would have been incented to do the same had I known then what I know now.

Posted by: Joe, Northern Va | January 17, 2006 3:46 PM

Your citation to the Experian "top 10 myths about bankruptcy" should warn readers that it contains erroneous information. Experian says in Myth No. 4 that judgments are not dischargeable. That's preposterous. Section 524 of the bankruptcy code, 11 U.S.C. ยง524, specifically states to the contrary: "A discharge in a case under this title--
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived."

Myth no. 4 also says that taxes are not dischargeable. Taxes can be dischargeable in bankruptcy depending on the circumstances. In general, unsecured income taxes that were first due more than three years before the bankruptcy is filed, for which a timely and non fraudulent return was filed, can be discharged in full in any chapter of bankruptcy.

Posted by: KennyB | January 17, 2006 6:01 PM

Carolyn: I think your findings were to be expected. I have been a bankruptcy trustee for more than 15 years. In my experience, very few of the people who filed bankruptcy were abusing the system. Further, very few of those who filed had income above this area's medium income which, under the new law, forces them into a Chapter 13 bankruptcy. To quote the late Frank Koger, a bankruptcy judge in the Western District of Missouri, the new law used a sledge hammer when a few minor ajustments were all that was needed.

Posted by: Tom O'Neal | January 17, 2006 7:39 PM

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