Both people and businesses sometimes require the protection of bankruptcy. Bankruptcy proceedings begin with a court filing that prevents collection activity and may end with a discharge of eligible financial obligations. Many individuals dealing with financial hardship may eventually need to consider bankruptcy. A successful bankruptcy filing can protect someone from foreclosure or wage garnishment. It can also eliminate certain repayment obligations.
However, many people avoid bankruptcy for as long as they can, often because they have inaccurate beliefs about bankruptcy. The five myths below about bankruptcy often deter people from filing.
Myth #1: Bankruptcy results in a loss of all assets
Not all forms of bankruptcy require access liquidation. Individuals typically select either Chapter 13 or Chapter 7 bankruptcy. Asset liquidation only occurs in Chapter 7 bankruptcy. Even then, the vast majority of people can protect most or all of their assets through the use of exemptions.
Myth #2: Bankruptcy permanently alters creditworthiness
A surprising number of people believe that a successful bankruptcy may follow them for life. That simply is not true. The record of a bankruptcy only remains on someone’s credit report for years after a Chapter 13 discharge or 10 years after a Chapter 7 discharge.
Myth #3: Credit isn’t available after bankruptcy
Revolving lines of credit typically close automatically when someone files for bankruptcy. However, once they complete the process, it can quickly start rebuilding their credit. Filers often qualify for new credit cards within a few weeks of their discharges in most cases.
Myth #4: Bankruptcy leads to major social stigma
While there certainly are some people who judge those who file for bankruptcy, most people never learn about another person’s bankruptcy filing. Although it is part of the public record, the average person doesn’t spend much time reviewing court records or newspaper announcements about recent bankruptcy filings. Even those who do learn about the bankruptcy may understand that extenuating circumstances are the underlying cause of the bankruptcy.
Myth #5: Qualifying for bankruptcy is hard
Quite a few people believe that only some individuals qualify for bankruptcy. They may convince themselves that there is an income limit for bankruptcy. In reality, only Chapter 7 bankruptcy has an income limit that applies. Successful professionals sometimes need Chapter 13 bankruptcy after job loss, medical issues or a business failure. Chapter 13 bankruptcy is available to people regardless of their income and the value of their assets.
Learning as much as possible about personal bankruptcy can potentially help people feel more comfortable with the idea of filing. Bankruptcy can provide relief from collection activity and may help someone regain control over their household budget, depending on the ins and outs of their unique circumstances.
