Bankruptcy can be an honest and legal way to achieve debt relief when your debt has become unaffordable due to financial hardship. Who is bankruptcy for and who is bankruptcy not for? I would state that bankruptcy is for those who have a strong desire to pay their bills, but do not and cannot have the ability to pay those bills.
Unfortunately there are many misconceptions about bankruptcy one must stop believing in order to see it as a legitimate resource to help achieve debt relief.
Misconception #1 – Bankruptcy means you do not have a financial future
Many people are afraid of filing for bankruptcy because they feel that it will cripple their future financial prospects. The truth is that it will decrease your credit score. This will lead to higher interest rates for at most ten years and limit access to credit. It means that you can still recover despite the setback. You will even have the ability to increase your credit card score later after the bankruptcy period is over.
Misconception #2 – Bankruptcy means you failed financially
A widespread belief exists that most people who file bankruptcy find themselves being looked down upon as if they failed financially. Even worse, they often end up believing it. However, that is not the case because bankruptcy could be fueled by external factors. For example, particularly poor economic performance and unfavorable government policies. It does not necessarily mean you are a failure as far as finances are concerned.
Misconception #3 – Bankruptcy means you will lose your assets such as a house or a vehicle.
You potentially could lose your house or other assets in a Chapter 7 bankruptcy. You can voluntarily forfeit these assets in a Chapter 13. There are state laws and exemptions that are in place to help you retain ownership of your property. Many laws are in place to ensure you will not have to give up your property once you enter into bankruptcy.
Misconception #4 – The bankruptcy status eliminates all of your debts
There are people who believe that filing for bankruptcy means they will no longer have any debt obligations. A bankruptcy filing will ease some of the debt, but that does not mean that you will be debt-free. You still have to pay off your debt and other financial obligations. For example, you may have to pay any tax payments that you may have avoided or missed. You will also still have your student loan debt.
Misconception #5 – What people will think when they find out you filed for bankruptcy
People are always worried about what others will say about any particular incident. That is the same case with bankruptcy filings. However, that will likely not happen and there is no need to worry about what people will think. Such information is not publicly released unless you are a celebrity. The only people who know about your bankruptcy status will be your creditors and people you tell about it. Such records are held privately, but it is highly unlikely that anyone will go digging into your financials.
Misconception #6 – Both you and your spouse have to file for bankruptcy
If you are married, going through hard economic times, and considering filing for bankruptcy, then it does not mean that both you and your spouse have to take the step. Sometimes it makes financial sense that both people in a marriage file for bankruptcy, but that is not a legal requirement. It is entirely normal for one person in the marriage to file for bankruptcy, leaving out the other. For example, you can file bankruptcy in the event your business goes down but does not mean that your spouse also has to do the same. This especially holds true if you do not run the business together. Even if you do, one person can file on behalf of the business.
Misconception #7 – Filing for bankruptcy is a tedious process
It is not necessarily the case, especially when you have an experienced lawyer to help you through the process. A bankruptcy lawyer will handle the paperwork and provide legal advice. This counsel helps ensure a smooth process with the best possible outcome.
Misconception #8 – Only people who are not financial savvy are at risk of bankruptcy
This misconception has to end now. As noted earlier, anyone might find themselves facing hard financial times at some point even if they are decent, hardworking, and honest people. Hardship is something that can affect anyone. There is no one particular type of people that are more prone to bankruptcy than others.
Misconception #9 – Bankruptcy means one will not access credit in the future
The belief that filing for bankruptcy will prevent you from gaining access to credit facilities in the future is another false belief. Of course, the bankruptcy period will decrease your credit score. As noted earlier though, one can build up their credit score and secure credit in the future. However, you should avoid letting your credit levels rise too much, so that you can avoid finding yourself in another debt situation that you cannot handle.
Misconception #10 – One can only file for bankruptcy once in their lifetime
Not true. Although bankruptcy laws became stricter in 2005, they still allow individuals to file for bankruptcy multiple times. However, this depends on the type of bankruptcy filed as well as the time that one filed for bankruptcy. The Bankruptcy laws indicate that one is allowed a discharge one every two years as per Chapter 13 and once over eight years as per Chapter 7.
Misconception #11 – Creditors will still be harassing you and knocking at your door even if you file for bankruptcy
It is not the case for anyone who files for bankruptcy. Once filed, the involved court issues notice to your creditors notifying them of your financial status and also ordering them not to go after you for failing to pay. It means that creditors should not come after you to repossess your property or keep badgering you with phone calls. You also protected from creditor lawsuits, which is not the case with debt settlement.
Misconception #12 – You can exclude some creditors from your bankruptcy filing if you are compelled to repay them
There are instances where you might want to exclude a particular creditor so that you can pay them back later. This is not possible in bankruptcy filings. The bankruptcy code dictates that you cannot repay them even after you get back on your feet financially even if you feel deeply that you need to pay them back.
What should I do?
The answer almost always is, “It depends”. Bankruptcy can be a great option for debt relief for different individuals. To help aid you in your decisioning process, we built a Chapter 7 Calculator and a Chapter 13 Calculator. These calculators will help determine whether you qualify, estimate your plan payment, as well as understanding the pros and cons of each solution.