Bankruptcy Myths

Deciding whether or not to file bankruptcy is already a difficult and stressful decision. But when you add in all of the myths surrounding bankruptcy, what for most people is a beneficial and pretty straight forward process can seem downright scary.

And that is a shame because it may stop people for whom bankruptcy really is not only the best option but the right option for themselves and their families from deciding to move forward. So let's bust some common bankruptcy myths so you can make your decision based on facts and not fear.

All Debts are Discharged

Millions of Americans are struggling under the weight of student loan debt and if you’re one of them, you might have considered bankruptcy as a solution. But unfortunately, student loan debt is one of the forms of debt that is very rarely forgiven under any circumstances and that includes bankruptcy.

Other forms of debt not discharged under bankruptcy include child and spousal support, many types of taxes, fines and penalties owed to the government, personal injury debts that are the result of a drunk driving crash, condo or co-op fee debt, attorney’s fees related to child custody and support cases, and fines or penalties levied by a court as a form of criminal restitution.

You’ll Lose All of Your Belongings

Perhaps the biggest of the bankruptcy myths is that you’ll be forced to sell or forfeit things like your home, car, furniture, electronics, and other assets. This isn’t true. The great majority of Chapter 7 bankruptcy cases are no-asset cases meaning the person filing doesn’t have to sell or forfeit any property.

Basic assets are exempt, people can’t be expected to function without basic possessions like cars and smartphones. What can and cannot be exempted varies by state so you’ll need to look into what is considered exempt in your location. What about the things that aren’t exempt? Most creditors are not going to waste their time going after them because either they just are worth very much or an item has a lien on it. If you file Chapter 13, you are allowed to keep all of your assets but the value of those assets is figured into your repayment plan.

Bankruptcy Will Destroy Your Future

There is no question that declaring bankruptcy takes a toll on your finances in some ways. Your credit score is going to drop significantly and the bankruptcy will be on your credit report for years to come. But how great is your credit score now? If you’re considering bankruptcy, it’s probably already pretty low.

Once you clear your debts through bankruptcy, you can start the process of rebuilding your credit score immediately. In fact, many people come out of bankruptcy with a higher credit score than when they started the process.

Yes, potential lenders, landlords, and creditors are going to see a bankruptcy on your credit report but that’s pretty clear cut. You filed for bankruptcy. Your debts have been forgiven and you’re rebuilding your finances. It’s much harder and more time consuming to explain all of the things on your report that led to the bankruptcy, the late payments, the defaulted loans, the shut-off utilities.

No, you won’t be able to get a credit card very easily for a few years. But is that a bad thing? For many people, credit cards are a big part of the reason they had to file for bankruptcy in the first place. You’ll take a debtor education course before your case is discharged and that class can help you understand how to better use credit cards when you eventually open one again (if you ever do).

Bankruptcy Filers are Financially Irresponsible

Some of them are sure. There are people who run up tens of thousands of dollars in credit card debt buying things they can’t afford. But the majority of those who file for bankruptcy, 66.5% in fact, filed primarily due to a medical event. Either because they could not afford the cost of their treatment or lost a lot of time from work due to a medical issue.

No matter how big your emergency fund or how good your insurance coverage, if you get sick or are injured in America, you are very unlikely to have enough money to pay for the cost of the medical bills that will start rolling in. Add missing work and not getting paid for that time and bankruptcy is not far off through no fault of your own.

Do you think the CEO of a company that filed for bankruptcy had sleepless nights agonizing over whether or not it was the right decision or feeling like a failure? Hell no! It was a business decision for the CEO and it should be the same for you.

Filing For Bankruptcy is Difficult

It really isn’t! In fact, you don’t even legally need a lawyer to do it although having a bankruptcy lawyer is highly recommended. But all you have to do to file is to correctly fill out the proper forms and correctly file them with the court.

You Can Only File For Bankruptcy Once

Well, hopefully, you only have to file once but you can file more than once. In the case of Chapter 7, you can file once every eight years. Chapter 13 can be filed for once every two years but usually takes three to five years to complete.

Facts Over Fiction

We hope that we’ve clarified some of the bankruptcy myths you may have encountered while researching the topic or talking to people about it. Because when you make a decision this big, facts over fiction.