5 Myths Surrounding Bankruptcy

By |2018-08-21T06:57:25+00:00July 28th, 2018|

When you’re drowning in debt, bankruptcy can be an escape route. Bankruptcy can help you discard or pay off debts and get some financial relief, but it can also be devastating for your credit, causing your credit score to take a nosedive.

Unfortunately, there are many misconceptions and myths surrounding bankruptcy. Here are five of the most common bankruptcy myths.

1. Myth – Bankruptcy Erases all Debt

One common belief is that, no matter what type of debts you have, they all get erased during the bankruptcy process. While bankruptcy can help you discharge and pay off debts, there are some types of debts that cannot be wiped clean.

Child support and alimony, court judgments, tax debts, and student loans generally cannot be discharged through bankruptcy. So if you’re considering bankruptcy to get out of these types of debt, think again.

2. Myth – Discharged Debts Will No Longer Hurt Your Credit Score

It may seem logical that if a debt is discharged in bankruptcy it is also removed from your credit report and no longer affects your credit score. In reality, that isn’t the case.

Even debts that are erased or paid off through bankruptcy will remain on your credit report and affect your credit score for seven to ten years. However, their impact will lessen as time goes on and eventually they will disappear entirely.

3. Myth – You’ll Lose All Your Assets

One common myth is that those who file bankruptcy lose everything. But in most cases, you should be able to keep much of your property.

Bankruptcy doesn’t necessarily mean you will have to give up your home, vehicle, and all your other assets. Although you may have to liquidate some of your property, you are able to declare exemptions for daily necessities, such as your home. Other possessions may hold no appeal to your creditors, simply because they aren’t valuable enough.

Most Chapter 7 bankruptcies are no-asset cases, meaning no property or cash is turned over. Under Chapter 13 bankruptcy, you keep your assets but their value is used to calculate a repayment plan.

4. Myth – Bankruptcy Affects Everyone the Same

Despite what you may have heard, bankruptcy doesn’t affect everyone’s finances and credit the same. Just because you know someone who went through a bankruptcy doesn’t mean your outcome will be similar.

Among other factors, the outcome of bankruptcy depends on the severity of your debt, the number of debts, the types of debt, and your credit score. For example, if you have a relatively low amount of debt related to only a few accounts, your credit score won’t take as much of a hit as someone with a more severe case.

5. Myth – Bankruptcy will Ruin Your Life Forever

Once you declare bankruptcy, you aren’t forever branded with a scarlet “B.” Over time, your finances and credit can recover from bankruptcy.

You can expect limited access to credit and higher interest rates for seven to ten years, but it won’t take that much time to rebound. In fact, your credit can start improving almost immediately, as long as you take measures to improve it and practice good financial habits. If you work on building your credit until your bankruptcy falls off your report, you can emerge with stronger credit than ever.