Common Myths About Bankruptcy

Most New Yorkers who would benefit from bankruptcy wait years before speaking to a lawyer. The delay usually has less to do with the law than with what people believe about the law. Friends, coworkers, and internet forums repeat the same misinformation: you will lose your apartment, you earn too much, your credit will never recover, the taxes stay with you forever. Almost none of it is accurate, and the cost of believing it is measured in garnished paychecks, frozen bank accounts, and interest that keeps compounding while you hesitate.

This page addresses the most common myths we hear from potential clients in the five boroughs and explains what the Bankruptcy Code and New York exemption law actually say.

Myth 1: You Will Lose Everything You Own

This is the most damaging myth, and it is almost always false. Bankruptcy is built around exemptions, which are categories of property the law places beyond the reach of the trustee and your creditors. In New York, a debtor chooses between two exemption systems under Debtor and Creditor Law § 285: the New York state exemptions or the federal exemptions listed in 11 U.S.C. § 522(d). You cannot mix the two, but you can pick whichever set protects more of what you own.

The New York exemptions include:

• The homestead exemption: CPLR 5206 protects equity in a home you occupy as a principal residence, including a condominium unit and shares in a cooperative apartment corporation. For the five boroughs, the protected amount is currently more than $200,000 per owner, and the figure adjusts every three years. Spouses who file together and both hold title can each claim the exemption, doubling the protection.
• Retirement accounts: CPLR 5205(c) exempts qualified retirement plans, IRAs, and pensions with very few exceptions. Your 401(k) does not go to your creditors.
• Household goods, a vehicle, tools of trade, and cash: CPLR 5205 and Debtor and Creditor Law §§ 282 and 283 exempt furniture, clothing, a motor vehicle up to a set equity value, work tools, and, for filers who do not use the homestead exemption, a cash allowance.

Debtors with little or no home equity often choose the federal exemptions instead, because 11 U.S.C. § 522(d)(5) contains a wildcard exemption that can protect several thousand dollars of anything at all, including money in a checking account or a tax refund.

In practice, the majority of Chapter 7 cases filed in New York City are no-asset cases. The trustee reviews the schedules, confirms everything is exempt, and distributes nothing to creditors. The debtor keeps the furniture, the car, the retirement account, and in many cases the home.

Myth 2: You Earn Too Much to File

Income does not disqualify you from bankruptcy. What the law imposes is the means test under 11 U.S.C. § 707(b), and even that applies only to Chapter 7 cases involving primarily consumer debts. If your debts are mostly business debts, the means test does not apply at all.

The test works in two stages. First, your household's current monthly income, calculated from the six full calendar months before filing, is compared to the median income for a New York household of the same size. Fall below the median and you pass with no further analysis. Exceed the median and you move to the second stage, which deducts allowed living expenses, secured debt payments, taxes, and other categories to determine whether meaningful disposable income remains. New York City's cost of living produces high allowed expense figures, so plenty of above-median New Yorkers still qualify for Chapter 7.

Because the calculation looks backward six months, timing matters. A filer who lost a job in March may fail the test in April, when the lookback still captures the old salary, and pass it comfortably in July. Details on how the calculation works, including the deductions available to city residents, are on our page about the bankruptcy means test in New York City.

And if you do not pass the means test, you are not shut out. Chapter 13 has no means test. It uses your income to fund a three-to-five-year repayment plan, often paying unsecured creditors only a fraction of what they are owed.

Myth 3: You Will Lose Your Apartment

New Yorkers hold their homes in forms that most bankruptcy commentary ignores: co-op shares, condo units, and rent-regulated leases. Each has its own rules, and none of them means automatic loss.

Co-op apartments: A co-op owner holds shares in a corporation and a proprietary lease, which is personal property rather than real property. CPLR 5206 expressly extends the homestead exemption to shares in a cooperative apartment corporation, so a co-op with equity within the exemption limit is protected in Chapter 7. Co-ops raise their own issues, including board maintenance arrears and transfer restrictions in the proprietary lease, which we cover on our page about co-op apartments in bankruptcy.

Condominiums: A condo unit is real property and receives the same homestead treatment. Owners behind on common charges should know that a condo board's lien and arrears are treated differently from ordinary unsecured debt; our pages on condo owners in bankruptcy and common charge arrears explain how Chapter 13 can catch up those amounts over time.

Homes with mortgage arrears: Chapter 13 exists largely for this situation. The plan cures the arrears over up to five years while you resume regular monthly payments, and the automatic stay under 11 U.S.C. § 362 halts a pending foreclosure the moment the petition is filed.

Renters: An ordinary residential lease is not lost in bankruptcy. Back rent is dischargeable in Chapter 7, though a landlord may still pursue possession after the stay lifts, and Chapter 13 can cure rent arrears to preserve a valuable regulated tenancy.

Myth 4: Tax Debt Can Never Be Discharged

Some taxes survive bankruptcy. Many do not. Income taxes, federal, New York State, and New York City, are dischargeable when they satisfy the timing rules of 11 U.S.C. §§ 507(a)(8) and 523(a)(1):

1. The three-year rule: the return was due, including extensions, more than three years before the bankruptcy petition.
2. The two-year rule: you actually filed the return more than two years before the petition.
3. The 240-day rule: the tax was assessed more than 240 days before the petition.
4. No fraud or willful evasion: the return was not fraudulent and you did not willfully evade the tax.

A worked example: your 2021 New York State income tax return was due April 18, 2022, and you filed it on time but could not pay the balance. The three-year period ran on April 18, 2025. A Chapter 7 petition filed after that date can discharge the 2021 income tax, along with the penalties and interest attached to it, assuming the other rules are met and nothing tolled the clock. An offer in compromise, a prior bankruptcy, or certain collection stays extend the deadlines, so the dates in the taxing authority's transcript must be checked against the calendar before filing.

Payroll trust fund taxes and sales tax collected from customers are not dischargeable, which matters greatly for business owners. The full analysis, including how warrants filed by the State affect the outcome, is on our page about New York State and City tax debt in bankruptcy.

Myth 5: Bankruptcy Ruins Your Credit Forever

Bankruptcy appears on a credit report for a limited time: ten years from the filing date for Chapter 7 under the Fair Credit Reporting Act, 15 U.S.C. § 1681c(a)(1), and seven years for Chapter 13 under the credit bureaus' standard practice. Those are ceilings, not sentences.

The comparison that matters is not bankruptcy versus perfect credit. It is bankruptcy versus your credit as it stands now, with charge-offs, collection accounts, judgments, and maxed-out cards dragging the score down month after month. A discharge stops that damage on a fixed date and resets the debt-to-income ratio to something lenders can work with. Most Chapter 7 debtors receive secured credit card offers within months of discharge, and conventional mortgage programs generally consider applicants two to four years after discharge. People who filed years ago and rebuilt routinely carry better credit than people who spent the same years juggling minimum payments.

Myth 6: Self-Employed People and Gig Workers Cannot File

Sole proprietors, freelancers, and app-based drivers file bankruptcy in New York City every week. Self-employment changes the paperwork, not the eligibility. Income must be documented through bank statements, 1099s, and profit-and-loss statements rather than pay stubs, and business assets and debts appear on the schedules alongside personal ones.

Two points work in favor of self-employed filers. First, if the debts are primarily business debts, the § 707(b) means test does not apply. Second, tools of the trade are exempt under both the state and federal systems, and a vehicle used to earn a living can often be protected. We have written separately about bankruptcy for Uber and Lyft drivers, whose leased or financed vehicles raise particular questions about reaffirmation and lease assumption.

Myth 7: Everyone Will Find Out

Bankruptcy filings are public records on the federal court's electronic docket, but public and publicized are different things. New York City sees thousands of consumer filings a year, and no newspaper prints them. Your employer is not notified in a Chapter 7 case. Your landlord is notified only if you owe them money. Federal law, 11 U.S.C. § 525, prohibits government employers from firing or discriminating against you for filing and prohibits private employers from terminating you because of a bankruptcy. In our experience, the only people who learn of a typical consumer filing are the creditors listed in it.

Myth 8: Filing Will Not Actually Stop Creditors

The opposite is true, and it happens immediately. The automatic stay under 11 U.S.C. § 362(a) takes effect the moment the petition is filed, without any hearing or court order. It stops collection calls and letters, pending lawsuits, wage garnishments (income executions under CPLR 5231), bank account restraints, foreclosure sales, and most repossessions. A marshal holding an income execution must stand down. A creditor that restrained your bank account must release it as to the debtor's exempt and estate funds.

A creditor who knowingly violates the stay faces actual damages, attorney's fees, and in appropriate cases punitive damages under 11 U.S.C. § 362(k). The stay has exceptions, most notably child support and spousal maintenance proceedings under § 362(b)(2), and repeat filers may receive a shortened or limited stay under § 362(c)(3) and (c)(4). For a first-time filer, though, the protection is broad and immediate.

Myth 9: You Can Only File Bankruptcy Once

The Code limits how often you can receive a discharge, not how often you can file. Under 11 U.S.C. § 727(a)(8), eight years must pass between the filing dates of two Chapter 7 cases that both end in discharge. Under § 1328(f), a Chapter 13 discharge is barred if you received a Chapter 7 discharge in a case filed within the previous four years, or a Chapter 13 discharge in a case filed within the previous two years. Someone who filed Chapter 7 in 2018 and has since been hit by new medical bills or a failed business is fully eligible to file again. Filing a Chapter 13 after a recent Chapter 7, sometimes called a Chapter 20, can still be useful to cure mortgage arrears or manage nondischargeable taxes even where no second discharge is available.

Myth 10: Only Irresponsible People File

Court statistics have shown for decades that medical debt, job loss, divorce, and business failure drive most consumer bankruptcies. In this city, add a rent burden that consumes half of many households' income and industries, restaurants among them, where a single bad season can bury an owner in personal guarantees. We see it regularly in restaurant bankruptcy cases, where an owner who signed guarantees on a lease and vendor accounts faces personal liability for a business that failed for reasons beyond anyone's control. Congress wrote the fresh start into federal law because it recognized that debt beyond any realistic ability to repay serves no one, including creditors. Using the remedy the law provides is a financial decision, not a moral failing.

How to Separate Fact From Fiction in Your Own Case

Every myth on this page contains a grain of truth that applies to someone. A filer with $600,000 of home equity has an exemption problem. A filer who received a discharge last year has a timing problem. A filer with recently assessed sales tax has a tax problem. The point is not that bankruptcy is free of consequences; it is that the consequences depend on your specific assets, income, and debts, and the only way to know them is to run your facts through the actual statutes rather than through a coworker's story about someone else's case.

A consultation should cover which exemption system fits your assets, whether you pass the means test or need Chapter 13, how each category of your debt is treated, and what the timeline looks like from filing to discharge. That analysis usually takes less than an hour and replaces months of speculation.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].