Even when bankruptcy is the right option, many consumers are reluctant to file based on misconceptions of filing will have on their lives. This is unfortunate because bankruptcy offers potential relief from the stress and anxiety of debt and the fresh start it can provide. Here are five surprising facts about bankruptcy that may allay some of those fears.
Myth #1: Filing for Bankruptcy Means You Will Lose Everything
One of the biggest fears surrounding bankruptcy is the belief that you will lose all your assets. Everyone who files for bankruptcy gets to keep some of their possessions, and most people get to keep all of them. While it's true that certain assets can be sold to pay off debts, bankruptcy law has specific exemptions that protect certain assets, such as your home (under certain equity limits), car, retirement accounts, furniture and personal belongings. A qualified bankruptcy attorney can help you understand these exemptions, demystify the process and alleviate your fears about losing everything you own.
Myth #2: Filing for Bankruptcy Will Ruin Your Credit Forever
It’s a common misconception that filing for bankruptcy will ruin your credit for life. If you are delinquent on several debts, this already appears on their credit record. A bankruptcy is unlikely to make your credit rating any worse; instead, it may make it easier to obtain future credit. New creditors will see that old obligations have been discharged in the bankruptcy and that you have fewer other creditors competing with them for payment. Creditors also recognize that consumers cannot receive a second chapter 7 bankruptcy discharge for another 8 years. After bankruptcy, your credit file will also list the outstanding balance as zero dollars for each of your debts discharged in bankruptcy.
Your credit file will list the fact that you filed bankruptcy and that certain debts at one time were delinquent, but creditors are most interested in what you owe now on each debt. The fact that a credit report shows that nothing is owed on a debt improves your credit standing.
Bankruptcy will make it more difficult for a consumer to obtain a new conventional mortgage to purchase a home. Even then, most lenders will not hold the bankruptcy against the consumer if the consumer re-establishes a good credit reputation for 2 to 4 years after a bankruptcy.
After bankruptcy, some new lenders may demand collateral as security, ask for a co-signer, or want to know why bankruptcy was filed. Other creditors, such as some local retailers, may not even check the credit report.
Myth #3: Bankruptcy Filers Must Go to Court and Face a Judge
Unless something out of the ordinary occurs, bankruptcy filers do not even go to court. They must attend one meeting with the bankruptcy trustee (not with a judge), and those meetings are usually held virtually (via video) and last only a few minutes. Creditors are invited to that meeting but rarely attend. In the rare case that a consumer does receive a notice to go to court, it is important that they go and first receive advice from an experienced bankruptcy attorney. Before a case is closed, the consumer must also take a course in personal finances, which will last for approximately two hours. The course can be taken online. In a Chapter 13 case the consumer may have to attend a court hearing on confirmation of the plan.
Myth #4: Its Morally Wrong to Not Pay Your Debts
Most people want to pay their debts and make every effort to do so if payment is possible. We know that because our clients come to us only after making a real effort to pay their bills. They might find themselves in a tough situation through no fault of their own: huge medical bills, divorce, job loss, helping a child with a crisis are many of the reasons people turn to bankruptcy. It isn’t just gross overspending and undisciplined lifestyles. If bankruptcy is the right solution, you should balance these feelings of obligation with the importance of protecting yourself and your family.
Bankruptcy is a legal right. The United States Constitution includes a provision concerning bankruptcy. Big corporations like Kmart, American Airlines, Chrysler, and Macy’s—and famous people such as Toni Braxton, Tammy Wynette, Larry King, Henry Ford, and Walt Disney—have all chosen to file bankruptcy.
Even the Bible provides for debt forgiveness:
At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1–2.)
Most important, during hard times, bankruptcy may be the only way for you to provide your family with food, clothing, and shelter. It may be that bankruptcy is the best or only realistic alternative.
Myth #5: Everyone Will Know I Filed for Bankruptcy
It probably seems like you’ll walk around with a red letter “B” on your forehead if you file but that’s only your fears playing tricks on you. Most people find their reputations do not suffer from filing bankruptcy. Bankruptcies are not generally announced publicly, although they are a matter of public record. Most people that I know wouldn’t have the foggiest idea how to locate the bankruptcy docket online. It is unlikely that friends and neighbors will know about a bankruptcy unless the you tells them.
Maybe, in a small town, where debts are owed to local people, reputational issues connected with filing bankruptcy may arise. In such a situation, weigh possible embarrassment and damage to reputation against bankruptcy’s potential advantages. One option is to voluntarily pay selected debts after bankruptcy, but a debtor cannot leave selected creditors out of the bankruptcy process entirely.
Considering bankruptcy can involve complicated emotions. Understanding the facts versus the myths surrounding it is crucial in making informed decisions about your financial future. If you're overwhelmed by debt and contemplating bankruptcy, consulting with one of our experienced bankruptcy attorneys can provide clarity and guidance tailored to your unique situation. Remember, bankruptcy is not the end—it's a means to reclaim your financial independence and begin again.