1) You have to be broke to file bankruptcy.

FALSE. This type of thinking about bankruptcy leads people to be broke going into bankruptcy, and broke coming out of bankruptcy. The best way to approach bankruptcy is to file before you get to a point that it is your only option and before liquidating all of your assets, like savings accounts, retirement accounts, or physical assets like your home or car. The state of Washington, and certain federal exemptions, allow you to keep assets up to a certain value. In the case of retirement accounts, there is almost no cap on the amount you can keep and still file bankruptcy.

2) You can modify your home loan in bankruptcy.

FALSE. Many homeowners have been lead to believe (mostly at the guidance of fly-by-night home loan modification companies) that they can seek a modification of their home loan in the bankruptcy court. This cannot be done. In fact, lenders must get relief from the bankruptcy court and remove the home from the bankruptcy estate in order to proceed with any type of permanent modification. If you’re going to pursue a modification, pre-bankruptcy, set your mortgage payment aside in an separate account. If the modification falls through, you’re going to need that money to bring your mortgage current in the bankruptcy setting.

3) Filing bankruptcy harms your credit score.

FALSE. Filing bankruptcy is actually the quickest, most effective way to improve your credit score. Your credit score is calculated based on your debt to income ratio. In bankruptcy, you discharge your debts. As long as your income remains the same, you now have a much better debt to income ratio, which increases your score. You can estimate a 60-100 point increase, if your score is in the high 500’s to low 600’s, within the first 6 months after filing.