Top 17 Bankruptcy Myths: The Truth About Bankruptcy
Bankruptcy is a legal process that provides individuals and businesses with relief from overwhelming debt. While many believe that bankruptcy is something that should never be considered, the truth is that it is an important tool provided under the law; bankruptcy is designed to give alternative and legal options to deal with crushing debt.
Despite importance of bankruptcy providing a fresh start to those struggling financially, there are many misconceptions and myths surrounding the bankruptcy process. These myths can lead to confusion and prevent people from taking advantage of the benefits that bankruptcy can provide. Below, you will find details debunking the top 17 bankruptcy myths to help you better understand the process and make informed decisions about your financial future.
Bankruptcy Myth #1: Filing for bankruptcy means you’re a failure.
Reality: Bankruptcy is a legal tool designed to help people who are struggling financially. It’s not a reflection of your character or your worth as a person. Bankruptcy can help people get a fresh start. You never know when debt or hard times might hit, and bankruptcy just allows a method to deal with the situation.
Plenty of famous and successful people have filed for bankruptcy: Milton Hershey, Larry King, Walt Disney, 50 Cent, Burt Reynolds, and many more. Bankruptcy sometime is often a strategic and legal option to best deal with a situation.
Bankruptcy Myth #2: Filing for bankruptcy will ruin your credit forever.
Reality: While bankruptcy will have an impact on your credit score, it’s not a permanent stain on your credit report. Many people are able to rebuild their credit after filing for bankruptcy. We routinely see individuals with credit scores over 650 within twelve months of discharge of their case. Similarly, bankruptcy helps many people improve their credit; if you have 30 to 90 day delinquencies on your credit or accounts that are maxed out, it is likely your credit score is under 600 and it is hard to make improvements, even with on-time payments. After bankruptcy, there is no debt reporting and any new accounts with good payments will help your credit score steadily.
Not having credit is the worst bankruptcy myth out there. It is a big reason why people refuse to file bankruptcy since they fear they will never be able to buy a house or a car ever again. But this is far from the truth; after Chapter 7 discharge, you can qualify for a FHA or VA mortgage in 2 years and a convention in 3 years. Buying a car with a car loan can happen right after bankruptcy, but your interest rates will be a lot better 6 to 12 months after discharge. Similarly, you will get credit card offers and car loan offers after filing Chapter 7 since creditors know you cannot file again for Chapter 7 for eight years; this makes you a decent credit risk. Many people receive new credit card offers during their case since some banks even search bankruptcy records and target recently filed individuals.
Bankruptcy Myth #3: You’ll lose everything you own if you file for bankruptcy.
Reality: While there are some assets in a Chapter 7 that may be sold to pay off creditors, many people are able to keep their homes, cars, and other important possessions. Each state is different with regard to what property may be at risk in a bankruptcy case.
A Chapter 7 bankruptcy case is called a liquidation, but only a small percentage of cases have assets that are liquidated. Many people keep their assets because they are protected. The law is written to allow debtors to keep certain things so they do not have to start over with nothing. In a Chapter 13, the debtors keep all their asset they want, but are in a long-term payment plan instead.
Bankruptcy Myth #4: Filing for bankruptcy is a lengthy and complicated process.
Reality: While there is some paperwork involved in filing for bankruptcy, the process is relatively straightforward. An experienced bankruptcy attorney can guide you through the process.
A bankruptcy petition does include a lot of financial information, including income, assets, debts, expenses, payments, property transfers and more. A Chapter 7 bankruptcy case typically lasts from three to four months from filing to discharge. While a Chapter 13 bankruptcy case usually lasts between three to five years.
Bankruptcy Myth #5: Only deadbeats file for bankruptcy.
Reality: Many people who file for bankruptcy have experienced a financial setback, such as job loss, divorce, or medical bills. Others are people looking for a way to consolidate their debt. Filing for bankruptcy is affirmatively taking a step toward managing your debt; it is the responsible thing to make your financial situation clear to creditors, so they do not spend more time trying to collect on debt that is really uncollectable.
Bankruptcy Myth #6: Filing for bankruptcy is expensive.
Reality: While there are some costs associated with filing for bankruptcy, it often is reasonable compared to the amount of debt most people are facing when considering bankruptcy. For many, a bankruptcy lawyer can be paid for instead of making minimum credit card payments for three to five months. There are also options for people who can’t afford an attorney. Many legal aid organizations offer free or low-cost bankruptcy services.
Filing for bankruptcy yourself is always allowed; however, this option is often discouraged. If you file a Chapter 7, you cannot get out of the case without court approval. As a result, if a trustee finds an asset that can be liquidated and you do not want to lose it, you may have limited options. It is nearly always cheaper to have a lawyer do the case right from the start then fix it later.
Bankruptcy Myth #7: You can only file for bankruptcy once.
Reality: While there are some restrictions on filing for bankruptcy multiple times, it is possible to file for bankruptcy more than once. Restrictions on filings exist between filing dates between each case.
After Chapter 7, you must wait eight years before filing another Chapter 7 or four years before filing a Chapter 13. After Chapter 13, you must wait six years to file a Chapter 7 (or less if Chapter 13 was 100% plan) or two years for another Chapter 13.
Some people file cases closer together; this may be allowed (depending on the basis of the case), but any sooner than the restricted time period and the filer will not qualify for a discharge.
Bankruptcy Myth #8: Bankruptcy only discharges unsecured debt.
Reality: While bankruptcy does discharge unsecured debt like credit card debt, it can also discharge secured debt like car loans and mortgages. Bankruptcy can sometimes also limited secured debt, by reducing or eliminating liens. Bankruptcy can also sometimes discharge taxes or even equitable distribution from a divorce case. It is a very power tool. Every case is different, and it is important to speak with an attorney to fully understand what debts can be discharged.
Bankruptcy Myth #9: You’ll lose your job if you file for bankruptcy.
Reality: It’s illegal for an employer to fire you for filing for bankruptcy. Most of the time your employer never has to find out that you have filed.
Bankruptcy Myth #10: Bankruptcy only helps people who are deeply in debt.
Reality: Even if you only have a small amount of debt, bankruptcy may be able to help you get a fresh start. Facing a garnishment is one of the main reasons people file and the amount of the garnishment may be even less than $5,000.00.
Debt is relative to each person; one person may be overwhelmed with $25,000.00 worth of debt, while another may find paying $25,000.00 of debt is easy over the course of a year. Each person has to review their situation and determine what makes the most sense for them.
Bankruptcy Myth #11: You can only file for bankruptcy if you’re unemployed.
Reality: You don’t have to be unemployed to file for bankruptcy. In fact, most people who file for bankruptcy are fully employed but have fallen on hard times or have too much debt to manage outside of bankruptcy.
Often, an attorney may not even recommend filing for bankruptcy when unemployed/without income. Since bankruptcy only includes debts as of the day of filing, if your future is very uncertain financially, then it may not make sense to file until things are more stable due to concerns of new debt.
Bankruptcy Myth #12: Filing for bankruptcy means you’re irresponsible with money.
Reality: Financial difficulties can happen to anyone, regardless of their spending habits. Bankruptcy was designed to help the honest, but unfortunate debtor. Even the most responsible people can lose their jobs, get sick, have unexpected medical bills, or experience a death in the family.
Additionally, many successful individuals filed bankruptcy including: Michael Vick, Francis Ford Coppala, and many more. Bankruptcy is often a responsible choice to ensure you are maximizing your financial situation and using a tool to deal with your debt. Bankruptcy allows debt to be restructured and dealt with in a more structured manner.
Bankruptcy Myth #13: You’ll lose your retirement savings if you file for bankruptcy.
Reality: Many retirement accounts are exempt from bankruptcy and can’t be used to pay off creditors. In Virginia your retirement is 100% protected from liquidation in bankruptcy. Most states have a high protection for retirement accounts; the law is set up to understand retirement savings is important. The truth is that the government recognizes that even in bankruptcy, certain assets need to be protected for long term success. As a result, most people should talk to a bankruptcy attorney before liquidating savings to pay off debt.
Bankruptcy Myth #14: Filing bankruptcy will ruin your reputation.
Reality: While it’s true that bankruptcy is a matter of public record, it’s unlikely that anyone outside of your creditors will know that you’ve filed. It is said that you likely are friends with multiple people who have filed but would never know because it really is up to the individual in most cases as to who finds out they filed.
Bankruptcy Myth #15: Bankruptcy is only for individuals.
Reality: Businesses can also file for bankruptcy if they are struggling financially. Businesses can use bankruptcy to shut down and seize operating or use bankruptcy to restructure their debt in hopes of continuing the business moving forward. Businesses can file both Chapter 7 (to shut down) or Chapter 11 (to restructure debt). Some famous business bankruptcies include: General Motors, Bed, Bath & Beyond, Toys ‘R’ US, J.C. Penney, Neiman Marcus, GNC, and many more.
Bankruptcy Myth #16: Filing for bankruptcy is a sign of weakness.
Reality: Filing for bankruptcy takes courage and can be a difficult decision to make. One must remember that filing bankruptcy is a legal option that individuals and businesses have to handle their debts and obligations.
Bankruptcy Myth #17: You will lose your security clearance, if you file for bankruptcy.
Reality: Many people keep their security clearances during and after their bankruptcy and individuals can obtain new clearances after bankruptcy as well. Filing for bankruptcy is a legal way to deal with your debt; by filing for bankruptcy you are able to show in a bankruptcy check and/or reviews that you are handling your debt and have a plan to deal with it. The truth is that bankruptcy can actually help some individuals get or keep their security clearance, depending on the situation. We have actually had some people file bankruptcy with our office after it was recommend to preserver or obtain their security clearances; a bankruptcy filing is nearly always going to be better for a security clearance review than having delinquent and outstanding debt.
Bankruptcy Myths Keep People from Making the Rights Decision about Debt
At the end of the day, it’s important to debunk the top bankruptcy myths and make informed decisions about your financial situation. Don’t let misconceptions hold you back from exploring a fresh start through bankruptcy if you’re struggling with overwhelming debt.
Remember, the bankruptcy laws are in place to provide you with relief and a chance to rebuild your financial future. To ensure you get accurate information and guidance tailored to your specific situation, it’s crucial to consult with an experienced bankruptcy lawyer. Schedule an appointment today and take the first step towards a brighter financial future. Don’t let myths deter you from exploring the benefits of bankruptcy and getting the help you need. Figure out the truth about bankruptcy and how it may help your specific situation.
Attorney Ashley Morgan is an experienced bankruptcy lawyer. She enjoys helping her clients manage their debts. She likes to educate her clients on all the available options to deal with their financial situation. She regularly is educating individuals about bankruptcy myths and all available options; she believes educating the public is the best way to make sure everyone makes the best and most informed decision possible. She wants you to make the best decision possible, even if it is to not file bankruptcy.