12 May 5 Bankruptcy Myths, Pieces of Misinformation and Lies
Bankruptcy is one area of the law that’s surrounded by a host of misinformation, myths, and outright lies. Because there are so many of these myths, some people can have an understanding of bankruptcy that has almost nothing to do with reality. To give you a better idea of what bankruptcy is, let’s take a closer look at some of the most common myths.
Myth 1: If you declare bankruptcy, you’ll never be able to get a loan again.
This myth is wrong, wrong, wrong. Yes, bankruptcy may hurt your credit score and make it hard to get a loan in the short term. But in some cases, bankruptcy will let you credit score rise, because creditors can no longer report late payments and the damage you’re currently doing to your score by making late payment after late payment will stop as soon as you file. A bankruptcy will remain on your credit report for up to 10 years, but many of our clients see a marked increase in their credit score within a year. You won’t have to wait 1o years to be able to obtain new loans.
In other words, bankruptcy can, in the long run, be a lot better for your credit than not filing.
Myth 2. You’ll lose all your money and possessions if you declare bankruptcy.
This myth is particularly harmful because it stops a lot of people who could greatly benefit by filing for bankruptcy. Many, if not most, people who file for bankruptcy won’t actually lose any of their possessions.
A bankruptcy trustee will look at what you have, what you owe, and determine what, if anything, you can pay. If you have a lot of assets, you might have to sell some. However, most bankruptcy filers won’t have to sell what they have in order to pay their debts because they only have exempt property. Exempt property is property that, by law, you are allowed to keep regardless of how much you owe. Further, many people who have some assets in excess of the exemption limits can still keep their property by restructuring their debts and entering into a more reasonable repayment plan.
Myth 3. You’re bankrupt if you’re broke.
The term “bankrupt” is both a legal term and a colloquial one. When many people say they’re “bankrupt,” what they really mean is that they don’t have any money; they’re broke. While this may be true, it has nothing to do with legal bankruptcy.
The only way you can use bankruptcy to protect yourself from your creditors and avail yourself of the safe harbor afforded to you under the law is to file for bankruptcy in a federal bankruptcy court. You cannot receive bankruptcy protections by “declaring” that you’re bankrupt. You have to file the proper legal documents and follow specific steps to receive bankruptcy protections.
Myth 4. You can get rid of all your debts if you file for bankruptcy.
While filing for bankruptcy can result in the discharge of many kinds of debt, some debts are specifically exempt. Past child or spousal support, back taxes, and most student loans are excluded from bankruptcy discharges. However, bankruptcy can allow you to discharge other debts, thus allowing you more income to devote to paying your non-dischargeable obligations.
Myth 5. Filing for bankruptcy means you’re irresponsible, immoral, or bad with money.
Of all the bankruptcy lies floating around out there, this is one of the more pernicious. Talking about money is something most of us are very uncomfortable doing, especially when we’re going through tough times. Feelings of pride and fear of being judged leads many people to dismiss the idea of bankruptcy out of hand.
It’s perfectly natural to feel stressed about the possibility of filing for bankruptcy. It’s also natural to feel bad about yourself for considering it. Though these feelings are understandable, they shouldn’t stop you from at least talking to a bankruptcy attorney about your options.
The legal and financial reality about bankruptcy is that it has nothing to do with being a good or bad person. It’s a legal option that makes financial sense for many people who are struggling with debt.
We’d all love to live in a world where responsible people prosper and live safe lives. But we don’t live in that world. Financial hardships can strike even the most prudent consumer. No matter how responsible, reasonable, and careful you are, you might have to file for bankruptcy protection because of circumstances that are completely out of your control.
Not only that, but your creditors want you to believe that filing for bankruptcy is irresponsible when, in reality, they know that it’s the exact opposite. Your creditors know they have a much better chance of making more money off of you if you don’t file. At the same time, they’re also taking advantage of every financial and legal trick available to them in order to protect their interests and take advantage of you.
Filing for bankruptcy is one of the most powerful tools consumers have to protect their own interests. It has nothing to do with you as an irresponsible person, and everything to do with realizing that bankruptcy affords you specific legal protections that can help you when you’re in a tough situation.