Bankrupt is a position most people never want to find themselves in. However, while bankruptcy does come with some temporarily financial setbacks, having to file isn’t nearly as bad as the myths make it seem. Bankruptcy is a drastic action, but for those overwhelmed with debt, it may be the best way forward.
Here are four of the most common misconceptions surrounding consumer bankruptcy and the facts behind them:
1. Bankruptcy is only for the financially irresponsible
Many people wrongly assume that individuals who file for bankruptcy are just those who recklessly manage their money. However, this couldn’t be further from the truth. According to the American Bankruptcy Institute, the top three causes of bankruptcy are severe illness, job loss and divorce. Poor financial management has little to do with most bankruptcy cases.
2. Bankruptcy means you will lose everything
The idea of bankruptcy often conjures up images of all of your personal belongings being hauled away forever to repay your debts. Fortunately, this isn’t the case. Essential items like a house, car and clothing are usually exempt with some limitations. Other nonessential assets are typically of little value to creditors.
3. Bankruptcy will eliminate all of your debt
Bankruptcy can discharge a significant portion of a person’s debts – including medical bills, credit card balances and personal loans. However, it cannot eliminate all types of debt. In most circumstances, the kind of debt that bankruptcy won’t discharge include:
- Student loans
- Recent income taxes
- Alimony or child support payments
4. Bankruptcy will ruin your finances for good
Many people have concerns about filing for bankruptcy, knowing that it will remain on their credit report for up to ten years. But the good news is, the effects of bankruptcy on your credit score will diminish over time. While it will take patience and consistent payments to rebuild credit, many people can qualify for a regular credit card after about six to 12 months.
Bankruptcy isn’t a cure-all for getting out of debt, but it can provide the relief needed to get back on track. Understanding the facts about bankruptcy can help you determine if it’s the right path for you.