9 Common Bankruptcy Myths: Separating Fact from Fiction

Bankruptcy often conjures up images of financial ruin and the end of the road to financial independence.

However, many of these perceptions are built on myths that can significantly affect your understanding of bankruptcy. Whether you’re contemplating filing for bankruptcy or simply want to understand the bankruptcy process much better, it’s crucial to separate the myths from the facts. This article will debunk some of the most common bankruptcy myths, helping you to make a well-informed decision about your financial future.

Myth 1: Bankruptcy is a financial failure

The biggest bankruptcy myth is that filing for bankruptcy equates to personal or financial failure. This couldn’t be further from the truth. Bankruptcy is a legal tool provided under federal laws, designed to give people burdened by debt a chance for a fresh start. Many responsible individuals face unforeseen circumstances such as job loss, medical emergencies, or economic downturns that can lead to financial distress. Bankruptcy provides a structured way to manage these overwhelming debts, not a reflection of personal failure.

Myth 2: Bankruptcy will ruin your credit report score forever

While it’s true that filing for bankruptcy can affect your credit score, it does not ‘permanently kill’ your credit. A bankruptcy can stay on your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13, but many people file bankruptcy begin to see their credit score improve much sooner. Post-bankruptcy, you can take steps to rebuild your credit through secured credit cards, responsible borrowing, and timely payments. In fact, since bankruptcy wipes out old debts, you may find it easier to manage new credit responsibly.

Myth 3: You’ll lose everything you own

Many fear that filing for bankruptcy means losing everything from your home to your personal belongings. However, bankruptcy laws include specific protections designed to keep people from becoming destitute. Most states have exemptions to bankruptcy codes that protect certain assets, like your primary residence, basic household goods, and a vehicle up to a certain value. These exemptions ensure that you don’t have to start from scratch and can maintain a basic standard of living.

Myth 4: Filing for bankruptcy is a lengthy and complicated process

The bankruptcy filing process does involve detailed documentation and an understanding of financial affairs, but it doesn’t have to be an overly complicated or endlessly lengthy process. With the help of an experienced bankruptcy attorney or a nonprofit debt management organization, you can navigate the paperwork and legal proceedings to file bankruptcy much more smoothly than you might expect.

A typical Chapter 7 bankruptcy case can be completed within three to six months, offering a quicker path to debt relief and financial recovery.

Myth 5: Only irresponsible people file for bankruptcy

It’s a common misconception that only those who mismanage their finances file for bankruptcy. In reality, many individuals who seek bankruptcy relief are hardworking people who have encountered unavoidable financial hardships such as unexpected medical bills, job loss, or divorce. These situations can strain finances to the breaking point regardless of how responsible someone is. Bankruptcy provides a legal means to manage uncontrollable debt and start anew, reflecting responsible financial management rather than irresponsibility.

Myth 6: Bankruptcy is prohibitively expensive

While there are costs associated with filing for bankruptcy, including attorney fees and filing fees, considering bankruptcy as “too expensive” is misleading. When weighed against the ongoing stress and financial burden of unmanageable debt, the cost of filing for bankruptcy is often reasonable.

Many bankruptcy attorneys offer payment plans, and there are options for free or low-cost legal services through various legal aid organizations. In the long run, the financial relief that filing bankruptcy often provides can far outweigh the initial expenses.

Myth 7: You can only file for bankruptcy once

This myth discourages many from considering bankruptcy as they fear they won’t have this option in the future if needed again. In reality, while there are time limits between filings, you can file for bankruptcy more than once. For example, after filing a Chapter 7 bankruptcy, you must wait eight years before filing Chapter 7 again but only four years to file for Chapter 13. These regulations ensure that bankruptcy remains available as a necessary tool for those in recurring financial distress.

Myth 8: Bankruptcy only discharges unsecured debt

Many believe bankruptcy only eliminates unsecured debts like credit card debt or medical bills. However, bankruptcy can also address secured debts, such as car loans and home mortgages, under certain conditions.

For instance, Chapter 13 bankruptcy can have creditors restructure these debts into more manageable payment plans, sometimes even reducing the principal balance or interest rates. Understanding the full scope of what debts can be managed through bankruptcy is crucial for those overwhelmed by various types of debt.

Myth 9: Bankruptcy will cause you to lose your job

The fear of job loss due to bankruptcy is unfounded. It’s illegal for employers to terminate employment solely because an employee filed for bankruptcy. This protection helps ensure that individuals can seek debt relief without fear of losing their livelihood. Additionally, in most cases, your employer will not even be aware of your various bankruptcy filings unless you choose to tell them or if you owe them a debt that makes them a creditor in your case.

Navigating Bankruptcy – The Road to Financial Recovery

After debunking myths about the dire consequences of bankruptcy, let’s learn how you can actually navigate your financial recovery. Once you’ve filed for bankruptcy, it’s crucial to start rebuilding your credit.

Obtain a Secured Credit Card

Start by obtaining a secured credit card, which requires a deposit that typically serves as your credit limit. Use this secured debt card wisely; small, manageable purchases followed by full payments can start to rebuild your credit history positively.

Check Credit Reports

Another key step is to consistently check your credit report for errors. Misreported information can be detrimental to your average credit score, and you have the right to dispute inaccuracies. Regular monitoring will help you track your progress and understand how different actions affect your credit score, guiding your financial decisions toward further improvement.

FREE Financial Counseling and Support

During these challenging times, you’re not alone. The Financial Counseling Association of America (FCAA) offers free consultations that can provide guidance on bankruptcy or alternatives. This nonprofit organization helps demystify the financial implications of bankruptcy and can assist in exploring other debt relief options that might be available to you.

Engaging in free consultation with the FCAA can empower you with the knowledge to manage your debts more effectively and make decisions that enhance your financial well-being.

Get Help Reducing Your Debt

EASY Wireless Lifeline Support

As you work towards financial recovery, reducing expenses is crucial.

EASY Wireless can help.

Through the federal Lifeline program, EASY Wireless offers FREE cell phone and data services to eligible individuals. By qualifying through participating in government assistance programs (like SNAP, Medicaid, HUD, etc.) or based on your income level, you can significantly lower your monthly expenses.

Having reliable communication aids in job searches, accessing financial management tools, and staying connected with support networks—all essential for rebuilding your life post-bankruptcy.

Visit one of our retail stores or apply online for these FREE Benefits from EASY Wireless.

Filing Bankruptcy: a Carefully Managed Fresh Start

Bankruptcy doesn’t have to be an end but a beginning to a more managed financial future. By understanding the real impacts and learning how to navigate the aftermath, you can use bankruptcy as a tool to reset your financial situation.

Don’t let common myths hold you back from exploring a fresh start through bankruptcy if you’re struggling with overwhelming debt. Remember, tools like the FCAA and programs like EASY Wireless are here to support you on your path to financial recovery. With the right information and resources, you can take proactive steps to reclaim your financial independence and stability.