Top Bankruptcy Myths Dispelled

Bankruptcy is a term which conjures up much emotion and a myriad of beliefs.  Our society, as a whole, tends to paint a bleak picture of bankruptcy and those who declare it.  We have probably all heard, at one point or another, “facts” such as: bankruptcy will ruin your credit for life; you will lose everything if you declare bankruptcy; only those who are deadbeats declare bankruptcy; and bankruptcy is too difficult to pursue.  The fact is, however, that for many Americans bankruptcy is actually a necessary path towards financial freedom and success.  For over one million financially struggling Americans annually, bankruptcy offers a much needed fresh start.

The following is a list of some of the top bankruptcy myths.  It is our hope in debunking these myths, you will obtain an accurate picture of the bankruptcy process, enabling you to make an informed decision on whether bankruptcy is a viable tool for you.

Myth #1: Bankruptcy will destroy your credit forever—this is probably the number one myth concerning bankruptcy.  Bankruptcy will significantly impact your credit.  It will drop your credit score by 200 points or more.  For 10 years following your bankruptcy, it will be viewable on your credit score.  However, you can rebuild your credit score in as few as two years.  For many debtors, filing for bankruptcy is actually the quickest way to achieve good credit.  When you are behind on their bills, this information is constantly being reported and continuously damaging your credit.  By filing for bankruptcy, all negative reports on your credit history stop.  You can then begin to build positive credit, and achieve a positive credit score in just a short period of time.

Myth #2: You will lose everything if you declare bankruptcy—there is a common belief that by declaring bankruptcy, you will lose your home, vehicle, and other assets.  The reality is that most of these possessions will be protected throughout the bankruptcy process.  Under Chapter 13 bankruptcy, you keep all of your assets and are not at risk of losing anything.  Under Chapter 7 bankruptcy, particularly in Florida, many of your assets will be exempt.  Florida offers numerous exemptions to debtors including: your homestead, the earnings of the head of household, motor vehicles (up to $1,000), proceeds of life insurance, and some personal property.  With proper planning and advice from your licensed bankruptcy attorney, you can protect those assets you care most about.

Myth #3: Only deadbeats declare bankruptcy—what do Abraham Lincoln, Henry Ford, Mark Twain, Walt Disney, Larry King, Burt Reynolds, Mickey Rooney, and Willie Nelson, all have in common?  They declared bankruptcy then went on to much success, fame, and wealth.  All of these individuals serve to highlight that bankruptcy can happen to anyone, even the most talented and intelligent among us.  Millions of hardworking Americans will find it necessary to file for bankruptcy each year.  For most people, their debts are not the result of frivolous spending or unwise monetary transactions.  In fact, the number one cause of the majority of bankruptcies today is health insurance debts.  No one should feel embarrassed or stigmatized by their decision to declare bankruptcy.

Myth #4: Filing for bankruptcy is too difficult to pursue—while bankruptcy does involve much paperwork, with the help of a knowledgeable bankruptcy attorney, the process will be smooth and simple.  An attorney with experience in the field can advise you as to your eligibility and navigate you seamlessly through all necessary filings.

At Scott Law Group, PLC, we are committed to ensuring each of our clients receive unparalleled legal representation.  Our seasoned attorney staff can fully advise you as to your bankruptcy options and help you select the best means to achieve a bright financial future.  Call us today at (727) 754-5001 for a free consultation.

Relief from Second Mortgages: Second Mortgages Can Now Be Stripped During Chapter 7 Bankruptcy

Like many Florida homeowners, Lorraine McNeal owed more on her mortgage than what her home was worth.  Ms. McNeal found herself a part of the ever growing portion of U.S. residents who are considered to be “underwater” in their mortgages.  Although home prices have risen throughout Florida in recent months, they are still far from the peak market prices of 2008.  This great disparity between owed amount and worth of the home leaves many Floridians and individuals across the country literally drowning in debt they cannot relieve.

Seeking freedom from her overwhelming monetary burdens, Ms. McNeal filed for Chapter 7 bankruptcy.  During the bankruptcy process, she requested the court “strip off” her second mortgage.  The term “strip off” means to remove an unsecured loan entirely, making the debtor not liable for repayment of any kind.  In Ms. McNeal’s case, her home was subject to a first priority lien of $176,413.  She had a second mortgage in the amount of $44,444, and her home was valued at $141,416.  Ms. McNeal urged that because the primary lien exceeded the value of the home, the junior lien, held by GMAC Mortgage, LLC, was wholly unsecured and therefore could be stripped off under 11 U.S.C. § 506(d).  The District Court denied the motion, ruling that § 506(d) does not apply to Chapter 7 bankruptcies.

Ms. McNeal appealed the decision to the Eleventh Circuit—and it ruled in her favor.  In the case of In re McNeal, No. 11-11352 (11th Cir. May 11, 2013), the Eleventh Circuit found that, pursuant to an older case entitled Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), debtors may strip wholly unsecured liens in Chapter 7 bankruptcy.  Previously, Florida courts had disallowed such actions, believing a case arising out of the U.S. Supreme Court overruled Folendore.

The McNeal decision places Florida in the minority of states which allow stripping off of second mortgages during Chapter 7 bankruptcy. Ordinarily, relief from second mortgages is only allowed through Chapter 13 bankruptcy.  The Fourth, Sixth, and Seventh Circuits have all held that junior liens cannot be stripped off under Chapter 7 bankruptcy.  Until recently, the McNeal decision remained unpublished, leading some Florida courts to elect not to follow the Eleventh Circuit’s opinion as it was merely persuasive.  Now, however, the opinion has been published and is binding on all Florida courts.

The McNeal decision is an extremely important one for Florida debtors.  The following as some key points to take away from the decision:

  1. You may now be able to entirely eliminate your second mortgage—if you are a Florida resident and owe more than your home is worth, you might be able to “strip off” your second mortgage using a Chapter 7 bankruptcy.  This means you are no longer liable for this amount and will never have to pay it back.
  2. Time is of the essence—recently, a petition for certiorari was filed in the Supreme Court requesting the Court address the issue of stripping away second mortgages in Chapter 7 bankruptcy.  Given the split between the circuits and the momentous impact of the issue on struggling homeowners nationwide, it is quite likely the Supreme Court will elect to decide the issue.  This creates uncertainty as to whether your ability to strip off your second mortgage using Chapter 7 bankruptcy will exist for long.  Therefore, it is important to act now.
  3. A knowledgeable Florida bankruptcy attorney can advise you on whether McNeal will offer you relief—to be eligible to strip off your second mortgage, you must meet certain requirements both under 11 U.S.C. § 506(d) and the general Chapter 7 bankruptcy guidelines.  A licensed, experienced Florida bankruptcy attorney will thoroughly examine your individual situation and find the best option for relief from debt for you.

Scott Law Group, PLC, has over 18 years experience in the field of bankruptcy law.  We are a team of dedicated professionals who strive above all else to protect our clients interests.  Call us today at (727) 754-5001 to find out how we can help you achieve financial freedom.