There comes a time in the lives of many actors when the idea of making their massive debt instantly disappear seems like the perfect, and perhaps only, solution to their problems—especially when a regular weekly paycheck appears about as likely as aliens carving concentric circles in a cornfield. Bankruptcy suddenly looks like a great option. But a lot of misconceptions surround this life-changing decision that puts a blot on your credit history for 10 years. And unlike other black marks on your credit report, this is not one you can work with creditors to have removed. To give you a better idea of what bankruptcy can and can't do for you, here is a short list of misconceptions about the subject:
Myth: "I may as well max out all my credit cards. Since I'm filing for bankruptcy, all those debts will be erased anyway."
Fact: Alas, bankruptcy courts call this fraud. Be assured the trustee in your case will scrutinize all the purchases you make right before you file for bankruptcy; the courts know all about this trick and will be on the lookout for it.
Myth: "All my debts will be wiped out in Chapter 7 bankruptcy."
Fact: Although most debts will be erased, certain types won't, such as student loans, alimony, child support, and debts incurred as the result of fraud.
Myth: "I'll lose everything."
Fact: You've probably noted celebrities who file for bankruptcy yet continue to live in their spiffy houses. How is that possible? It's because certain kinds of assets—such as your house, your car (depending on what you owe on it), money in a qualified retirement plan, household goods, and clothing—may be exempt. The dollar amount of these asset exemptions varies from state to state, so this is an important issue to discuss with your attorney before filing.
Myth: "I'll never be able to get credit again."
Fact: You will be able to get credit, but the offers will come from subprime lenders who charge sky-high interest rates. For this reason, most bankruptcy experts suggest that if you're planning to buy a house or car, consider doing so before you file. Having a high interest rate on a large purchase like this will significantly affect your payments. And yes, bankruptcy courts consider this a different kind of debt than trying to max out your credit cards right before filing.
Myth: "I won't be able to get rid of back taxes through bankruptcy."
Fact: While this is generally true, there is tax bankruptcy, which can eliminate back taxes. It requires that you file all your returns and that the taxes owed be at least three years old.
Filing for bankruptcy isn't as easy as it once was, thanks to legislation pushed through Congress last year requiring that bankruptcy filers be screened by income.
According to the new law, debtors must first provide an estimate of their income by averaging their last six months' earnings. Those whose incomes fall below a certain threshold (which varies from state to state) qualify for Chapter 7, in which most debts are forgiven. Those with higher incomes, however, must file under Chapter 13, which requires they remain in bankruptcy for several years while they repay part of their debt through installments. In addition, the new law mandates that those looking to declare bankruptcy undergo credit counseling to determine whether they can repay their debts through a payment plan.
If all of this sounds bleak, here's a bit of good news that most people forget: If you have a credit card with a zero balance on the day you file for bankruptcy, you don't have to list it as a creditor—because you don't owe any money on it. Even after bankruptcy, you'll get to keep that card.