Myths and Truths about Bankruptcy
Bankruptcy: the word carries dread for some, a sense of relief for others and negative connotations for still others. It’s also a word that brings with it a lot of misinformation. The fact is that most people who find themselves contemplating bankruptcy are doing so because circumstances outside their control left them with no other options; bankruptcy is a last resort that may be their only chance to regain their financial footing.
Here are the top eight myths, and truths, about bankruptcy:
1. Myth: Filing for bankruptcy will destroy your credit score.
Truth: It is true that your credit score will take a hit after a bankruptcy, but that hit is only temporary. As long as you take action after your bankruptcy to build up a good credit score, you can recover and have a healthy credit record again. Odds are good that if you had to declare bankruptcy, it was because you were already having trouble meeting your financial obligations. Bankruptcy helps you get back on track so you can focus on building a positive record again.
2. Myth: Your creditors can choose to disregard your bankruptcy and can take you to court to recover what you owe them.
Truth: Creditors cannot “opt out” of having debts discharged through bankruptcy proceedings. When your creditors have been notified of the bankruptcy, they are not allowed to contact you directly about the debt any more, and they cannot sue you to recover what you owe them.
3. Myth: The “means test” means most people do not qualify to file for bankruptcy.
Truth: In order to qualify to declare bankruptcy, people must meet the “means test” in the bankruptcy laws, which looks at a debtor’s income and may look at whether he or she has the means to repay the debt. When the bankruptcy laws were revised in 2005, the commentary was that the new laws made it almost impossible to qualify for bankruptcy. In reality, many people do qualify.
4. Myth: You will never be able to buy anything using credit again.
Truth: Bankruptcy will mean that, for a while after your bankruptcy is discharged, you will not be offered the best interest rates or terms when you apply for credit. But, you can actually apply for credit shortly after the bankruptcy has been discharged by the court. This can help you build up a good credit history, post-bankruptcy. It is important to remember to use credit wisely.
5. Myth: Filing for Chapter 7 bankruptcy means your debts will go away.
Truth: Bankruptcy does not relieve all of your financial obligations. Chapter 7 bankruptcies do discharge many kinds of debt, however know that certain types of debt, such as student loan debt, cannot be discharged.
6. Myth: You can only file for bankruptcy once in your lifetime.
Truth: How frequently you can file for bankruptcy depends on the type of bankruptcy you filed. If your debts were discharged through a Chapter 7 bankruptcy, you will have to wait six years before you can go through a Chapter 13 bankruptcy, and eight years before you could go through Chapter 7 again. If your debts were discharged through Chapter 13, you will have to wait at least two years before another Chapter 13 discharge, and at least four years before a Chapter 7 discharge.
7. Myth: If a married person wants to file for bankruptcy, he/she must file with his or her spouse.
Truth: Not true! If one spouse is facing bankruptcy because of individual debt, he or she can file for bankruptcy individually rather than jointly. This is sometimes the case when a couple gets married and one spouse brings a lot of debt into the marriage.
8. Myth: Filing for bankruptcy means I am a failure, and everyone will know about it.
Truth: You are not a failure or a loser because you have to declare bankruptcy. If anything, it shows that you recognize you can no longer go it alone without help. While there is a small subset of the population who take advantage of the bankruptcy laws in appropriately, the vast majority of people who find themselves in financial straits are there because of mistakes or circumstances outside their control. And, generally, nobody but you, your creditors and the professionals you work with will know that you declared bankruptcy. While it is true that bankruptcy proceedings are court proceedings that are technically public information, odds are good that your friends and family members are not scouring the legal news reports looking for your name.
Conclusion
There are a lot of unfounded myths about bankruptcy that simply are not true. If you find yourself contemplating bankruptcy, do your homework and talk to professionals who have experience working with other people in similar situations.*
*This article provides broad and general guidelines and does not constitute professional financial or legal advice. You should not use this article as a substitute for your own judgment, and you should consult professional advisers before making any tax, legal, financial planning or investment decisions.