Myth 1: People Filing for Bankruptcy Have No Money

A popular question a bankruptcy attorney often gets is: “If your client is filing for bankruptcy, how can they pay you?” This question assumes two things. First, that bankruptcy takes everything that a person owns and leaves him with nothing, and second, that the person filing for bankruptcy is completely penniless. Both assumptions are incorrect.

The intent of bankruptcy is to give a person a “fresh start”. The bankruptcy code allows for certain exemptions that determine whether you can keep certain property or not. For example, in a Chapter 7 case, if  you own a car that is worth $2,000 and the exemption is $2,500, you can keep the car after the bankruptcy. What if the car you is worth $10,000 and is paid off? In that situation, the trustee will most likely sell the vehicle, pay you the exemption amount and pay the rest to your creditors. Keep in mind that it will cost the trustee to sell the vehicle so if the value of the vehicle is slightly above the exemption amount, it may not be worthwhile for the trustee to go ahead with the sale. In a Chapter 13, a person can keep all their possessions while making a monthly payment to the trustee that will pay off a certain percentage of their unsecured debt. (Generally, all secured creditors have to be paid in full).

So how can debtors pay their bankruptcy attorney? In a large majority of bankruptcy cases, debtors have steady jobs and regular income. What they also have is large debt. Remember that the idea behind bankruptcy is “debt relief”. Because of the large debt, the monthly expenses of individuals who struggle financially exceed the monthly income and they have trouble making their monthly bills.  Imagine a person that has to pay $500 in credit card bills each month. Once a bankruptcy case is filed, the debtor no longer has to pay those bills and has additional income of $500 per month.

In short, most of people who file for bankruptcy are employed. The reason they file is because their debt becomes unmanageable and it makes financial sense to consolidate the debt either through a Chapter 7 or Chapter 13 case.