5 Myths About Bankruptcy You Should Know

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Despite the plethora of information available online, there are still bankruptcy myths circulating that are just that—myths.  With something as important as bankruptcy, it’s important to understand the facts and learn how to distinguish them from fiction.  

1.       Everyone will know I’ve filed.

While it is true that bankruptcy is a public record and is searchable as such, unless you are a high-profile individual, it is unlikely that anyone in your circles will know that you’ve filed for bankruptcy.  The number of people who file each month in any given city or area often makes it impossible for the media to focus on printing names; although in some smaller communities, the newspapers still do this.

2.       If I file Chapter 7, I don’t have to pay back any of my debts.

This is certainly a nice thought but it’s a myth, nonetheless.  Certain debts such as alimony, child support, student loans and fines for criminal acts must still be paid, even after filing for Chapter 7.

3.       If I file bankruptcy, I’ll lose my house, car, possessions, etc.

It is important to know that each state provides exemptions to bankruptcy filers, allowing them to keep a considerable amount of their property—up to a particular value.  A bankruptcy attorney will be able to explain in detail what you may or may not lose in the process of filing. 

4.       I can kiss credit goodbye if I file. 

Although for 2-4 years, you might only qualify for subprime loans, there are still many lenders who are more than happy to provide credit to people who have filed for bankruptcy—even Chapter 7 bankruptcy. 

5.       If my husband/wife files, that means I have to file, too. 

This situation is highly dependent on whether both spouses are liable for the debt.  If both names are on most debt, then yes, it would make more sense for both spouses to file.  However, if only one spouse’s name is on a considerable amount of debt, that spouse can file, leaving the other spouse’s credit unscathed.  

Common Bankruptcy Myths You Should Know Before Filing

There is a lot of misinformation about bankruptcy floating around, and debunking these myths can help clear the air and make your decision one that is based on the facts rather than fallacies. 

Myth #1: The process of filing bankruptcy is as simple as filling out a few forms.

There is nothing about the bankruptcy process that is simple.  It is a complicated, expensive and often long legal process.  While bankruptcy is certainly a process that can help consumers who have too much debt, it is also a very serious legal endeavor that has potential for future litigation.  All bankruptcy forms are filed in Federal court and are looked over carefully by a trustee whose job is to liquidate your assets and pay your creditors, if possible.  Even if you claim exemptions, your bankruptcy trustee has the power to object to the assets you use for these exemptions. 

Myth #2: I will lose all of my property if I file for bankruptcy.

If you file a chapter 7 bankruptcy, your non-exempt property will be subject to being sold and liquidated to pay your creditors.   However, your exempted property is yours to keep and cannot be liquidated in the bankruptcy process.  When you file bankruptcy, your bankruptcy trustee will oversee your estate and make a decision regarding the property that is non-exempt.  In many cases, the cost of liquidating non-exempt assets is more than their worth, so it might be the case that you get to keep everything you currently own.  Many people who have filed for bankruptcy haven’t lost a single piece of property or asset in doing so.   The amount and type of exemptions vary depending on whether you own your own home, are married and other factors.  Consult a qualified bankruptcy attorney for your specific exemptions, but ninety percent of our clients get their fresh start while keeping their home and maintaining their vehicle.

Myth #3: I can never qualify for credit again.

It is often the case that as soon as a bankruptcy is filed, debtors are swamped with credit offers.  This is surprising to some but reveals a truth about the myth that once you file bankruptcy, you can’t qualify for credit again—it’s simply a false statement.  While a bankruptcy can stay on your credit for 10 years if you file a Chapter 7, the ability to borrow money is largely based on your debt-to-income ratio.  If a bankruptcy reduces or eliminates your debt, then it’s even possible that your FICO score can be higher after a bankruptcy than it was before it.