Bankruptcy allows those with unsustainable financial circumstances to address outstanding debts and limit aggressive collection activity. Despite the prevalence of bankruptcy on a social level, misinformation about bankruptcy is incredibly common.
Many people believe the five myths described below. They may choose not to file for bankruptcy because they misunderstand what the process involves.
Myth 1. Bankruptcy is an admission of personal failure
Quite a few people view bankruptcy as a sign of poor financial practices and possibly even ethical failures. However, most people who file for bankruptcy don’t get into debt intentionally or due to irresponsible choices. Job loss, medical emergencies and divorce are among the reasons that people file for bankruptcy. None of those situations are indicative of a personal failure.
Myth 2. Bankruptcy costs a filer everything
Another common belief about bankruptcy is that those who file have to eliminate all of their property. Asset liquidation is part of the Chapter 7 bankruptcy process. People can also file for other forms of bankruptcy that do not require asset liquidation. More importantly, those filings for Chapter 7 bankruptcy can exempt assets from liquidation. Most people do not have to give up their home equity, personal vehicles or retirement savings during bankruptcy.
Myth 3. Bankruptcy permanently ruins credit
Some people believe that a bankruptcy filing may permanently eliminate their eligibility for credit. Bankruptcy does show up on a credit report, but it is subject to reporting limitations. After a Chapter 7 discharge, the credit bureaus can only report the bankruptcy for 10 years. After a Chapter 13 bankruptcy, records of bankruptcy discharge roll off of a credit report after seven years.
Myth 4. Only the poorest people qualify for bankruptcy
There are different types of bankruptcy for different situations. Chapter 7 bankruptcy is only available to those who pass a means test. They have to have below-average income. Chapter 13 bankruptcy is accessible even to successful business owners and professionals. Individuals with higher incomes also tend to carry more debt and may find that bankruptcy is necessary after economic disruptions.
Myth 5. Bankruptcy is easy to manage alone
People may convince themselves that they can navigate the bankruptcy process without assistance. They can then make mistakes that result in the courts dismissing their bankruptcy filing. They could also fail to take the right steps to discharge their most significant financial obligations. The average person is unfamiliar with the law and court proceedings. Particularly in cases involving high levels of debt or other complicating factors, the person filing for bankruptcy can increase their chances of success by securing legal representation.
Learning the truth about personal bankruptcy can help people take control of their finances. A personal bankruptcy filing may make it possible for people to avoid major financial setbacks and regain control over their economic circumstances.
