With all the myths and misinformation about the concept of bankruptcy, many people would be surprised to learn that bankruptcy can solve their debt problems. While filing bankruptcy is never a straightforward decision, the lies and myths surrounding the concept scare many people away.
For instance, your friends or even financial advisers may have told you about how filing bankruptcy will destroy your credit or how you will lose all your property. As a result of these and many other half-truths, you may also have convinced yourself that filing bankruptcy means you are financially irresponsible.
Contrary to all the myths and misconceptions, bankruptcy can improve your credit and give you a fresh financial start. Mostly, many of the negative things you may have heard about bankruptcy are untrue. In most cases, they are advanced by uninformed or malicious people, including creditors whose goal is to keep you in debt.
If you are considering filing bankruptcy but are unsure because of what you have heard or read about the process, don’t worry. Read on as we dispel some of the common lies, myths, and misconceptions about the bankruptcy process.
Myth #1: Married couples will both have to file
It is untrue that you and your spouse have to file for bankruptcy as a couple. The bankruptcy law allows anyone, including married couples, to file for bankruptcy either individually or jointly. Married couples only have to decide whether to file as individuals or jointly as a couple. Essentially, there are some instances where individual filing makes more sense than joint filing and vice versa.
For example, where one spouse has a significant debt to their name, filing for bankruptcy individually is more sensible. Filing as an individual is especially advisable for a new marriage with no joint debts, and one spouse has good credit.
However, joint filing might make more sense if you and your spouse have common or shared debts, including mortgages, credit cards, and bank loans. Typically, if both spouses share the liability for the debt and only one file, creditors have the right to demand full payment from the non-filing spouse.
Myth #2: Bankruptcy permanently kills your credit
This is false. While bankruptcy will affect your credit rating, it cannot permanently or entirely destroy it. Depending on state exemptions and the form of bankruptcy you file, a bankruptcy only remains on your credit report for between seven and ten years. Even then, its effects are not permanent, and you can still incur new debt, including on secured credit cards.
Even though the credit rebuilding process following bankruptcy is usually complicated, the claim that bankruptcy will permanently kill your credit is only a myth. For instance, while you are not allowed to incur new debt while in a Chapter 13 bankruptcy, you can start rebuilding your credit as soon as the repayment period is over.
Interestingly, a bankruptcy, especially a Chapter 7, may be good for your credit score as it gets rid of your debt and related consequences, including interest and attorney fees. Whether a bankruptcy remains in your credit report for five or ten years, it does not permanently destroy your credit. It is likely to improve your credit in the long run.
Myth #3: Bankruptcy discharges all debt
While bankruptcy can improve your credit and offer you a fresh start, it does not discharge or eliminate all your debt. Mostly, bankruptcy, especially Chapter 7, will get rid of your unsecured debts, including personal loans, medical bills, utility bills, and ordinary credit card debt. However, some debts are not easy to discharge through bankruptcy.
Debt arising from child support and alimony are some of the debts that bankruptcy cannot discharge. Student loans and most tax debts, including current income taxes, are also not dischargeable. Even where a tax debt is dischargeable, bankruptcy cannot discharge any criminal fine imposed as part of a tax offense.
Myth #4: It’s hard to file for bankruptcy
Not true. Following bankruptcy law changes and other technical improvements, filing for bankruptcy has never been easier. While you need to fill and file the necessary paperwork and submit it to the court, you can complete most of the process online. In some instances, you can do it yourself without any legal assistance.
However, it is advisable to speak to a lawyer when filing for bankruptcy. Essentially, some complex bankruptcy components necessitate legal aid, including when choosing the right chapter to file and when citing applicable bankruptcy exemptions in your application. However, whether you require extensive legal aid or need to consult an attorney on a few issues, filing for bankruptcy is not hard. With the help of a reasonable bankruptcy attorney, it is so much easier.
Myth #5: You can only file for bankruptcy once
Absolutely false. While there are bankruptcy laws that limit when you can file again, there are no restrictions on how many times you can file for bankruptcy. Similar to other uncertainties in life, you cannot guarantee financial success. Accordingly, if your financial situation necessitates filing bankruptcy more than once, there is nothing wrong with it.
However, when you can file for a subsequent bankruptcy depends on when you last file and the type of bankruptcy. For instance, you can file for a Chapter 7 bankruptcy every 8 years and a Chapter 13 every 2 years. If your last filing was a Chapter 7, you could only file for a Chapter 13 after 6 years, and if it were a Chapter 13, you would have to wait for 4 years before filing a Chapter 7.
Interestingly, you do not even need to wait to re-file if your previous bankruptcy case was dismissed. However, to avoid mistakes in such a situation, it is advisable to speak to a skilled bankruptcy lawyer. However, just because the law allows you to file for bankruptcy more than once does not mean you should do it, especially if you can avoid it. Typically, multiple bankruptcies will harm your credit.
Myth #6: Filing bankruptcy means I’m a failure
Besides the familiar lies, filing for bankruptcy is also stigmatized. The misconception that bankruptcy is for financially irresponsible people is probably the worst bankruptcy myth. While some people seek bankruptcy after reckless financial decisions, bankruptcy is usually a result of financial difficulties due to unexpected events or a non-performing economy.
Some of the significant causes of bankruptcy include job loss, divorce, and severe illness. Essentially, these are everyday events that can affect anyone regardless of their level of personal or financial responsibility. For instance, substantial medical bills, the cost of a divorce, including legal fees and long-term employment, usually result in bankruptcy even for the financially responsible.
While bankruptcy can be useful during such difficult financial times, the personal failure myth has unfortunately led many people to avoid it. However, most people file for bankruptcy due to factors beyond their control, including an unhealthy economy, and not because they are failures.
Myth #7: I will lose all my property
The claim that you will lose all your property after filing for bankruptcy is untrue. Federal and state exemptions protect most of your family property, including your house, vehicles, and personal items like clothing. Contrary to the misconception that you will lose all your property, debtors rarely lose any property in bankruptcy.
Additionally, some states, including Texas, allow people to choose between federal and state exemptions. Accordingly, a skilled bankruptcy attorney can help you protect as much of your property as possible. Even for a Chapter 7 bankruptcy that involves liquidating assets to pay creditors, the process rarely involves selling all your property and leaving you destitute.
Typically, most of the assets that aren’t exempt have very little resale value, and creditors will not be interested in them. For instance, your laptop or flat-screen TV has little intrinsic value to warrant a resale. However, you are likely to lose unnecessary luxury property or goods, including a second home or a luxury yacht.
Myth #8: I’ll never be able to get credit again
It’s not true. Even though bankruptcy can remain on your credit report for up to 10 years, your credit score is likely to recover quickly after the discharge. Unlike in the past, where even lenders stigmatized bankruptcy, things have changed, and you can get credit offers even in bankruptcy.
Even though the credit offers usually come with higher interest rates, they are a testament that you can get credit despite filing for bankruptcy. With proper financial planning and consultation with a skilled bankruptcy attorney, many people have bought new homes, cars and qualified for credit card debt a few months after a bankruptcy discharge.
Since many lenders understand the concept of bankruptcy, they are willing to offer credit to people affected by bankruptcy. However, your credit score plays a significant role in the kind of debt creditors are willing to offer you.
Myth #9: Bankruptcy will solve all my financial problems
Not so. While bankruptcy can eliminate your debt obligation and allow you to start afresh, it does not solve all your financial problems. For most people, their financial issues run deeper than debt or a difficult financial situation. From reckless spending to long-term unemployment, there are so many issues that bankruptcy will not solve. Bankruptcy will certainly not prevent a divorce, a severe illness, or any other life event that can lead to financial difficulties. However, with proper planning and a change of attitude, bankruptcy offers a fresh start to a better relationship with your finances.