While counterintuitive for many people, bankruptcy filings have sharply decreased since the pandemic began in 2020. Filings have been expected to rebound for some time. With increasing pressure from expired pandemic relief measures, growing inflation, and rising interest rates, more individuals may find it necessary to explore their bankruptcy options. While the decision to file bankruptcy is daunting, it is important to know how it may provide relief. Here are five common bankruptcy myths.


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1. Bankruptcy is for deadbeats.

This is simply false. Common triggers for filing a bankruptcy include job loss, serious illness, medical expenses, a failed business venture, divorce, or other unforeseen circumstances. Most individuals who file bankruptcy are hard-working, honest people who usually wait too long to file, unnecessarily spend retirement funds, and carry shame about their decision. The policy behind bankruptcy is to provide a “fresh start” and it is the right choice for many people.

Carrie Tatkin is a partner at Radix Law.

2. You will lose all your money and possessions.

Not so. Every state has exemptions to protect certain property, such as vehicles, retirement accounts, certain life insurance, household items and even equity in your home (Arizona protects up to $250,000 of equity in your home). If you own property that is not protected by available exemptions, a reorganization under Chapter 13 or Chapter 11 often allows you to keep all your property in exchange for paying back some of what you owe.

3. You can’t get rid of past tax liabilities in bankruptcy.

Yes, you often can. If you have filed your tax returns, most state and federal taxes can be discharged in bankruptcy if they are more than 3 years old and meet certain other criteria. There is no limit to how much income tax liability can potentially be discharged. Certain business-related tax liabilities like withholding or sales taxes cannot be discharged, no matter how old they are. Still, bankruptcy options can be weighed with a view to erasing all possible debt, leaving only a manageable amount of non-dischargeable obligations.

4. If you are married, both spouses must file bankruptcy.

Again, not true. Arizona is a community property state. It is often desirable for spouses to file jointly, but under limited circumstances it may make sense for only one spouse to file. When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse’s community bankruptcy discharge. A creditor with a claim against the non-filing spouse can only collect its debt from the separate property of the non-filing spouse. Sometimes no such separate property exists.

5. Bankruptcy leads to divorce and destruction of family relationships.

Often just the opposite. The relief clients feel after they have received their bankruptcy discharges can be immense. The stress of creditor harassment is gone. The chance to start over, usually with a renewed commitment to financial security, is always valued by clients. While bankruptcy can often accompany a divorce, a well-timed bankruptcy can be a decision that places families in a healthier, more collaborative place.

Many more myths and misinformation circulate, so it is important to ensure that individuals are armed with accurate information as they consider bankruptcy as a potential path to a better financial future.

 

Carrie Tatkin is a partner at Radix Law, with a practice focused on consumer and business bankruptcy, representing both creditors and debtors. With more than 35 years of legal experience, Carrie is adept at handling all aspects of her clients’ bankruptcy matters.