10 Common Myths About Declaring Consumer Bankruptcy
Bankruptcy can be the best solution or the last resort for many Americans in the midst of personal economic turmoil. With mounting debt and few options to get out from under the pile of bills, some turn towards personal bankruptcy as a way out.
Unfortunately, there are a lot of widely-held myths surrounding bankruptcy that may incorrectly discourage those in financial trouble from taking the proper steps to protect their finances. To make educated financial decisions, consumers must separate fact from fiction in the bankruptcy process.
Myth: Creditors Will Take Everything
Fact: Most people filing for bankruptcy lose very little, if anything at all. According to Bankrate.com, certain assets such as homes, cars, money in certain retirement plans, household goods and clothing are typically protected from collection. In addition, vehicles and homes with liens can be kept as long as the owner continues to make monthly payments.
Myth: Filing For Bankruptcy Will Not Affect Your Spouse’s Credit
Fact: If shared accounts are included in the bankruptcy filing, the account will show up on the spouse’s credit report as a bankruptcy, according to Bankrate.com. If no accounts are shared, the filing should not affect the spouse’s credit. It is recommended to check credit reports after all debt has been discharged to ensure accuracy.
Myth: All Debt Can Be Erased With Bankruptcy
Fact: Not exactly. Unsecured debt, like medical bills and credit cards can be erased with bankruptcy. However, debt resulting from child support, alimony, student loans, court-ordered restitution or taxes will not be eliminated through bankruptcy and will require continued payment.
Myth: Bankruptcy Will Prevent Any Credit Score Improvements For Ten Years
Fact: Despite the fact that creditors will see the bankruptcy as part of the consumer’s credit profile for ten years, bankruptcy law firm Bolinske & Bolinske reports that improvements in credit scores can be seen in as little as two years as long as the debtor's balances are kept current and credit reports are accurate.
Myth: Not All Debts Need To Be Listed When Filing For Bankruptcy
Fact: All debts must be included, including personal debt. A consumer cannot pick and choose which accounts to disclose. However, Bolinske & Bolinske recommends that if a consumer feels strongly about paying a debt back, he can continue to do so after the bankruptcy has been discharged.
Myth: Bankruptcy Will Give The Consumer A New Start
Fact: Actually, most consumers do begin receiving credit card offers shortly after filing for bankruptcy; however, they are often from subprime lenders with exorbitant interest rates, bankruptcy attorney Howard Ehrenberg tells Bankrate.com. This is because bankruptcy will leave a negative notation on a consumer’s credit report, affecting overall FICO scores. In addition, low FICO scores can even affect a consumer’s ability to get a job or rent an apartment.
Myth: Getting A Loan Or Mortgage After Bankruptcy Is Impossible
Fact: According to Laura Bramble's article, "How Do I Get a Mortgage After Bankruptcy & Foreclosure?" posted on SFGate.com, it is possible to get a competitive home loan post-bankruptcy, sometimes in as little as two years. But it may take some work on the part of the consumer in order to reestablish credit worthiness. In many cases, lenders will also want to know what caused the financial trouble and how the borrower is preventing it from occurring again.
Myth: Late Payments On Credit Cards Are Just As Bad As Bankruptcy
Fact: Although late payments do leave negative marks on credit profiles, they are not as detrimental to your credit as a filed bankruptcy, according to Bankrate.com. Most creditors understand that consumers go through rough patches and are willing to take late payments into consideration when approving loan and credit applications. Late payments can be corrected and erased from the credit report much quicker than a bankruptcy.
Myth: Bankruptcy Is For Losers
Fact: Bankrate.com claims that most consumers who file for bankruptcy do so after a life-altering event such as a divorce, the death of a spouse, a medical emergency or the loss of a job. Often times the situation is beyond their control and bankruptcy is a final effort to regain control over their finances.
Myth: A Consumer Can Only File For Bankruptcy Once
Fact: A consumer can file for Chapter 7 bankruptcy once every eight years. According to TotalBankruptcy.com, this type of personal bankruptcy liquefies assets, completely eliminating unsecured debt. Chapter 13 bankruptcy, however, can be filed more frequently. TotalBankruptcy.com explains Chapter 13 as an "adjustment of debts" and provides the consumer the opportunity to repay delinquent debts based upon a predetermined schedule. Overall, filing multiple bankruptcies is strongly discouraged by nearly every financial expert.
Bankruptcy is an unfortunate reality for many people. And in some instances, it is the best option for debt management. Understanding how bankruptcy will affect your short- and long-term financial goals is critical. Financial planners and bankruptcy lawyers can help assess your personal finances and advise the best course of action based on your individual circumstances.