The idea of filing for bankruptcy can cause a lot of anxiety, and it's easy to understand why. It's a major financial decision that will impact you and your family for the immediate future. However, it may also be the best way to start fresh, protect what you have, and give yourself the best chance of recovery. Around 1.5 million people file for bankruptcy in the U.S. each year, but that doesn't mean the ins and outs of bankruptcy laws are easy to understand. In fact, there are a lot of misconceptions surrounding bankruptcy. Unfortunately, when people are misinformed, they'll be less likely to seek help from a bankruptcy lawyer. We're exposing the truth behind some of these commonly held bankruptcy beliefs below.
TRUE OR FALSE? Those who file for bankruptcy automatically lose everything in the process.
Answer: False. There are bankruptcy laws that protect certain assets, and it largely depends on what type of bankruptcy you file. Those who choose to file for Chapter 13 bankruptcy will not lose their home due to foreclosure and can keep property whether it is exempt or not. In many cases, those who file for Chapter 7 bankruptcy won't lose their homes either, but it does depend on the circumstances. With Chapter 7, you will lose non-exempt property, but state exemption laws do often protect equity in homes, cars, clothing, furnishings, work-related tools, and even retirement accounts like Social Security and 401ks. Because bankruptcy laws vary from state to state (and from case to case), working with an attorney will allow you to get a better understanding of what filing for bankruptcy means for you.
TRUE OR FALSE? Filing for bankruptcy will wipe out all debts.
Answer: False. While filing can wipe out certain debts and provide a lot of relief, it's not a cure-all. There are certain debts that can never be taken away by bankruptcy filings, including child support, alimony, student loans (in the majority of cases), and criminal fines. However, debts from mortgages, credit cards, car loans, medical bills, and personal loans can be discharged when you file for bankruptcy. Keep in mind that no matter what type of bankruptcy you choose to file for, you'll have to make certain sacrifices to get that financial relief; you may lose some of your property or may have to live an extremely modest lifestyle for the next five years or so. Still, for many people who are drowning in debt, these sacrifices are well worth it. Just know that filing won't wipe out everything or solve all your problems.
TRUE OR FALSE? Your credit will be ruined when you file for bankruptcy.
Answer: False. Yes, your credit will take a hit when you file and your filing will stay on your credit report for the next decade. However, that doesn't mean that your credit has to be horrible for the foreseeable future. There are plenty of ways to build up credit even while that filing stays on your report. Many experts recommend that those who file take advantage of the credit card offers they receive in the mail. Secured credit cards with low limits and higher interest rates can help you establish some credit if you use the card for making small purchases that you pay back in full every month. This last piece is key, as that's what will help improve your score. And ultimately, filing for debt relief through bankruptcy is much better for your credit than falling further into debt. Potentially, you may be able to get your credit score back up to those desirable levels within a few years.
Filing for bankruptcy can sound extremely intimidating or like the panacea to all your problems, depending on your point of view. In reality, it's neither. It's an important financial decision that you and your attorney will have to make. For many, it can provide some much-needed respite and a chance to start anew, but you will have to put the work in. The first step is learning more about how your state's bankruptcy laws may affect you. Contact a reputable lawyer in your area today to find out more.