You need to be very careful when you are listening to “common wisdom”, since much of that is rooted in fact that has long since ceased to be accurate, or is “fact” that started as an assumption but is not based in reality. This is particularly true when you are considering a step as drastic as bankruptcy, which also carries some long term negative aspects, not the least of which is a huge blemish on your credit history report for the next seven to ten years.
One of the popular myths about bankruptcy is that when one files for bankruptcy, they will lose everything they own; i.e., their house, their car, their furniture, right down to that box of unopened dog biscuits. The bottom line is that this is simply not true. While bankruptcy is not something that you want to enter into without having carefully considered each and every one of your possible alternatives and options, the goal of the bankruptcy court is not to kick you when you are down, and turn you into one of the millions of homeless people.
The reality of the situation is that most items that are necessary for to live are exempt from being seized and sold in the event of you filing for bankruptcy. Even with the recent changes in the bankruptcy laws, consumers who file bankruptcy are allowed to keep personal items that are exempt from being sold to satisfy creditors, with of course certain stipulations and conditions.
Any consumer who is filing bankruptcy must complete detailed paperwork which includes disclosure documents that must indicate the nature and total amount of all of the consumer’s assets. This form will also require detailed information about how income, all of your financial obligations including any mortgage or car payments, as well as any other assets such as pensions, stocks, savings accounts, CDs, etc. Be very aware that this is no time to kid around or forget anything, since providing inaccurate or downright false information on this form is a federal offense and could land you in prison for bankruptcy fraud. Do not be tempted to take the chance of making your bad situation much worse.
If the outstanding balance on your mortgage is more than 80% of its value, you may keep your home. If you car is worth less than $2000 in fair retail price, you can also keep your car. If you have some money tucked away somewhere in a checking or savings account, you need to report it but you are allowed to keep $2000 in cash when filing bankruptcy. Your pension and IRA accounts are typically exempt, especially since there is usually a huge early withdrawal penalty if the funds are removed early to pay off creditors. If you have a children’s college fund setup and as long as it is labeled as a college fund account, it is also exempt.
Again, the reason for these exemptions is that filing for bankruptcy was designed to protect you from your creditors, where all of them are calling you at all hours of the day and night, sending threatening letters and sending collection agencies after you. Bankruptcy protects you from that stress. But at the same time, the purpose of bankruptcy is NOT to turn you into a homeless person who now lives on welfare. It is well understood that you need a place to live, clothes to wear, and transportation to get to work.
Bankruptcy is not easy, and the recent drastic changes in the bankruptcy law make it something that is really no longer a do-it-yourself project. The money you save with a bankruptcy attorney to guide you through the process is a drop in the bucket compared to how much more you may have to give up if you don’t know the letter of the law.