Even though the numbers show that filing for personal bankruptcy can be an effective way to get out of debt, many people avoid doing so because they worry about the effect it will have on their finances and their credit score. Some even believe that personal bankruptcy is illegal or that all bankruptcies are created equal, but neither is true. In this article, we’ll cover 5 common myths about personal bankruptcy and provide you with the facts behind each misconception.
Myth #1: It’s too expensive!
There are two types of personal bankruptcy—liquidation and reorganization. With liquidation, you’ll typically have to sell off your non-exempt assets and then pay creditors back with whatever’s left over after covering your expenses. But if you choose reorganization (you’re far more likely to get a fresh start with reorganization), you can keep all your assets if they’re exempt from liquidation. However, you may have to agree to a repayment plan for future income or property. The idea is that even if it takes time for property values or income stream to recover, at least you won’t have these ongoing monthly payments more than what’s needed for living expenses.
Myth #2: I can solve my financial problems by filing for bankruptcy.
The idea that you’ll be free from all your debt after you file for bankruptcy is a lie. It’s also one of the biggest reasons that people who could get out of debt on their own opt instead for bankruptcy, which will cripple them financially for years. When you file for bankruptcy, it stays on your credit report for 10 years (at least 5 in some states). That record can make it difficult—or impossible—to rent an apartment or buy a car. In addition, there are costs associated with filing for and going through with a Chapter 7 bankruptcy: attorney fees and court fees that can easily add up to thousands of dollars. If you’re considering bankruptcy, weigh all your options first before taking such a drastic step.
Myth #3: A bankruptcy can ruin your credit score.
A bankruptcy can stay on your credit report for up to 10 years, but you should know that it doesn’t have as big of an impact on your credit score as you might think. The good news is that bankruptcies typically don’t affect your score for more than a few years—which means you can continue using credit and rebuilding your score in no time. Your payment history is still one of the biggest factors when it comes to determining your score, and if you have bad credit now it’s probably because you haven’t been making payments on time or at all. If you’ve filed for bankruptcy already and are working hard to pay off what you owe, it may not be long before lenders start approving new accounts in your name again.
Myth #4: You should wait until you hit rock bottom before filing for bankruptcy.
I often see patients who have gotten into financial trouble because they were waiting for something bad to happen before acting. They didn’t want a bankruptcy on their credit report, so they continued spending and charging. They thought bankruptcy was only for those with no other option when it’s a way to get back on your feet and regain control of your financial future. Don’t wait until it’s too late — you can get out of debt sooner than you think!
Myth #5: You will lose everything if you file for bankruptcy.
The truth is that people who file for bankruptcy don’t lose everything, nor do they have their assets confiscated by creditors. If you can prove that your failure to pay a debt is due to a financial hardship like job loss or medical bills, you may be able to get out of paying some of what you owe. Even if your personal property gets seized after you file for bankruptcy (and it often doesn’t), most of us still own things we can live without. Even if your business or home gets repossessed, there are some exceptions in which those things aren’t considered assets and won’t be taken from you. What happens depends on where you live, so make sure you check into any local laws regarding bankruptcy before making any decisions.