Bankruptcy is a powerful legal tool, but it is one that many people do not really understand. There is as much misinformation floating around about bankruptcy as there is accurate information. Arguably, the average person probably knows more myth than legal truths about bankruptcy. The five myths listed below are among those that could have the biggest damage to individuals.
- Only poor people file for bankruptcy
One of the most common misconceptions about bankruptcy is that it only helps those with low or no income. Individuals with significant personal income could also have high levels of debt. In fact, it often costs more to work a high-status and high-paying job because everything from your vehicle to your clothing faces more scrutiny.
- Bankruptcy is a sign of financial irresponsibility
If people acknowledge that those other than low-paid working-class people file for bankruptcy, they probably assume that those higher-earning filers made irresponsible or outright selfish decisions. In reality, even skilled professionals may only be a single car crash or severe illness away from insurmountable medical debt and far more bills than income.
- Bankruptcy means you have to give up everything
Bankruptcy is synonymous with the requirement to liquidate your property for many people. While it is true that Chapter 7 filings require the sale of certain assets, property ranging from some of your home equity to value in a vehicle is exempt from creditor claims in bankruptcy. Additionally, there are other forms of bankruptcy, like Chapter 13, that don’t require that you get rid of any property at all.
- Bankruptcy gets rid of all of your debt
Some people assume that bankruptcy simply erases all of their debt. They might think they could keep their home without paying off their mortgage or erase six figures worth of medical school debt. In reality, it is largely only unsecured debts that are eligible for discharge. Student loans, in particular, can be hard to discharge. Other debts are not ever eligible for discharge, including federal tax debt.
- Bankruptcy will forever limit your financial opportunities
Bankruptcy absolutely limits what credit opportunities you have right after filing. Still, most people find that they can get a credit card within a year and finance bigger purchases within a few years of bankruptcy.
Depending on the kind of bankruptcy you file, at the latest, your bankruptcy will be off of the public record a decade after your discharge. At that point, it will have no impact on your credit other than its contributions to your ability to rebuild your financial circumstances.
Learning more about the bankruptcy process can help you evaluate whether it could be the right way for you to take control of your life again.