Bankruptcy is often the last option people consider when they’re dealing with financial hardship. Frequently, a bankruptcy filing occurs after a creditor initiates a debt-related lawsuit or the filer is at risk of foreclosure or vehicle repossession.
People often let their finances reach extreme states of disarray before they honestly contemplate bankruptcy. Their aversion to bankruptcy likely stems in no small part from the myths people share about the bankruptcy process. Learning the truth behind the three myths below could give people the courage and confidence they need to pursue personal bankruptcy.
What misinformation do people frequently share about bankruptcy?
Myth 1: Bankruptcy costs the filer everything
Many people claim that bankruptcy forces the filer to liquidate most, if not all, of their property. While it is true that Chapter 7 bankruptcy sometimes requires asset liquidation, not everyone must sell off their property as part of the bankruptcy process.
Chapter 13 bankruptcy does not require asset liquidation because the filer commits to a repayment plan. Even in a Chapter 7 bankruptcy case, filers can use exemptions that allow them to protect some of their assets from liquidation, such as their retirement savings.
Myth 2: Bankruptcy eliminates future credit opportunities
Bankruptcy does have an immediate negative impact on an individual’s credit. The filer’s score may drop by 200 points or more. Lenders that provided them with revolving lines of credit, such as credit cards, are likely to close those accounts immediately.
However, bankruptcy is only a temporary blemish on an individual’s credit report. The credit bureaus have to stop reporting a Chapter 7 bankruptcy 10 years after the discharge date. Chapter 13 bankruptcy comes off the filer’s credit report seven years after their discharge.
Myth 3: Other people judge those who file for bankruptcy
While there is a degree of social stigma attached to bankruptcy, it is less now than it was years ago. Astronomical medical debts are now a leading cause of bankruptcy, which is a fact many people understand. Economic uncertainty and student loans can also leave people with unsustainable budgets.
People are less judgmental about bankruptcy now than they were a few decades ago. Additionally, the decline in newspaper readership means that the neighbors of people who file for bankruptcy are unlikely to know about the bankruptcy case unless the filer says something to them. Long gone are the days when the vast majority of people read the newspaper daily and checked the legal section to see who filed for divorce or bankruptcy.
People who learn the truth behind bankruptcy myths may decide to pursue this valuable legal process and eliminate some of their debts. Filing for bankruptcy can halt aggressive collection efforts and give filers an opportunity to reduce their long-term financial obligations.