Many people have misconceptions about bankruptcy. Not just the process, but also about the future fallout that comes from declaring bankruptcy. While bankruptcy should be taken seriously, it’s often not as scary as people think, said Michael Bovee, co-founder of debt relief company, Resolve. “People are so afraid of bankruptcy, they don’t even look,” he said. “They won’t even pick up the rock and see what’s underneath.”
Before choosing to file for bankruptcy, it’s important to make sure bankruptcy is the right option for your debt problems. To do that, you need to separate fact from fiction when it comes to common bankruptcy myths like these:
1. Bankruptcy will haunt me forever.
“It’s the big scarlet letter B myth,” said Charles Phelan, founder of debt management company, Zipdebt. He explained that some people seeking debt relief believe that everyone will know they’ve been through a bankruptcy and they will never be able to financially rebound. While the process of filing a bankruptcy can be arduous and is not to be taken lightly, it also won’t ruin you, Phelan said.
2. My credit will never recover.
Bankruptcy will definitely have a negative impact on your credit score, but it won’t last forever and it might not be as far of a tumble as you think. A Chapter 7 bankruptcy will stay on your credit report for 10 years and Chapter 13 bankruptcy for seven years. But the farther in your rearview mirror the bankruptcy gets, the less negative weight it will have on your credit score. And the fastest way to rebuild your credit is to use it responsibly. (Timely bill payment makes up 35% of your score.) Credit card companies will come knocking with new card offers very quickly after your bankruptcy is resolved, Bovee said. But be very careful about using credit again. The card offers you get may have very high interest rates and you don’t want to wind up in debt again.
3. I’ll never be able to finance anything again.
The idea of not being able to borrow money for a long time understandably makes people nervous. But filing bankruptcy doesn’t mean you’ll never be able to get new credit or a loan. And you won’t have to wait seven or 10 years to borrow again. “Within a year, I’ve seen people get 4-5% car loans, you can get an FHA loan two years after bankruptcy,” Bovee said. If you absolutely must make a large purchase in the near future, you probably want to hold off on filing bankruptcy, but if your main concern is handling your debt, not buying a car or home, then it’s worth a look.
4. There’s not much difference between Chapter 7 and Chapter 13 bankruptcy.
There is a big difference between a Chapter 7 and Chapter 13 bankruptcy, from how long each lasts to what they accomplish. A Chapter 7 bankruptcy is shorter (it typically takes about 90 days) and it may involve selling nonexempt assets to pay your debts. A Chapter 13 bankruptcy is called a “wage earner plan.” To qualify for a wage earner plan, you must have a steady income that allows you to pay back all or part of your debts through a repayment plan lasting as long as five years. The benefit of a Chapter 13 bankruptcy is that it gives you a good chance of keeping your house or car. But Chapter 13 is more expensive and it can be very hard for people to stay on a payment plan for so long, Bovee said. One missed payment and you could be back where you started.
5. I’ll lose my house if I file for bankruptcy.
It’s true that with a Chapter 7 bankruptcy, there is a chance you could lose your home. But it’s not a given. It depends on if you’re current on your mortgage and how much equity you have in your home. If you don’t have much equity, a bankruptcy trustee likely won’t sell your home to pay your creditors. If you have a lot of equity, you’ll want to protect it. If your state’s homestead exemption laws allow you to protect all or almost all your equity, there’s a good chance a trustee won’t sell your home. In a Chapter 13 bankruptcy, meanwhile, you can keep your home as long as you stay current on your mortgage payments.
6. I can get rid of all my debts with bankruptcy.
The kinds of unsecured debt that are discharged in a bankruptcy include things like credit card debt, medical debt, past-due amounts on utility bills, business debts and past-due rent. If you owe the IRS back taxes, that can be wiped out in bankruptcy too, Bovee said. But the tax debt must be older than three years old and you have to have filed all your required tax returns. But not all debts will be wiped out in bankruptcy. Student loans are very, very hard to discharge and alimony and child support can’t be discharged.
7. Bankruptcy is a personal failure.
No two financial situations are the same, but many people wind up headed down the bankruptcy path because of situations out of their control. Major medical bills, job loss, and divorce or separation are some of the life events that tend to land people in financial trouble, Phelan said. “There’s no shame in this if you need it,” he said.
8. I don’t have enough money to pay a lawyer, but I can file bankruptcy myself.
Bankruptcy is a complicated legal process. Your petition can be thrown out for even simple mistakes made on your filing. “I think it would be silly for a person to go down the path of bankruptcy without hiring an attorney,” Phelan said. The success rates for filing with and without an attorney tell a pretty clear story. For Chapter 7, people who represented themselves were successful 66.7% of the time versus a 96.2% success rate if they used a lawyer. For Chapter 13, people who didn’t use a lawyer were successful just 2.3% of the time verus a 41.5% success rate with a lawyer.
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