April 21, 2020
Myths about Bankruptcy
Bankruptcy is a solution that has helped many people get back on their feet. Unfortunately, there are quite a few myths about Chapter 7 and Chapter 13 bankruptcy that seem to never go away. Some of those myths cause people to look for other ways to deal with their financial problems; many of them end up in worse financial shape than before.
Educating yourself about what bankruptcy can and cannot accomplish involves understanding what are myths. Start with these four and learn what really happens. With the misconceptions out of the way, you can make an informed decision about bankruptcy and whether it’s the right solution for you.
Myth #1: You Have to be Unemployed to File for a Chapter 7 Bankruptcy
This one has been around for a long time and is one of the easiest myths to dispel. The majority of people who file for a Chapter 7 are gainfully employed. Some course of events has led to being unable to manage their debts based on current income levels. If you have a job and wonder if you qualify for bankruptcy protection, consult a bankruptcy attorney and undergo what’s known as a means test. Assuming that you pass, it’s possible to file.
Myth #2: Filing for Bankruptcy Means You Get to Keep All of Your Assets
Another myth related to Chapter 7 bankruptcy is that you get to keep all of your assets. A companion myth claims that you have to surrender all of your assets to the court. The truth is actually found somewhere between these two false statements.
When you file a Chapter 7 bankruptcy, the court distinguishes between exempt and non-exempt assets. Essentially, exempt assets are considered necessities and will remain yours to keep. Non-exempt assets are not considered essential to living a reasonable quality of life and are typically surrendered to the bankruptcy trustee. Non-exempt assets are sold and the court distributes the money to your creditors. Once that’s done, the remaining debt is discharged.
What’s generally considered an exempt asset? The home where you live and the car that you drive to and from work are often classed as exempt. Second homes, stocks, and other holdings may be considered non-exempt and subject to sale. Your attorney will help you determine if there are any assets that must be surrendered to the court.
Myth #3: Filing a Chapter 7 or Chapter 13 Wrecks Your Credit
If you’re to the point of considering bankruptcy, your credit score is likely already damaged. While it’s true that you may see an additional drop around the time that the case is filed, most people notice that their scores begin to improve within six months to a year after the filing. In this sense, bankruptcy can stop the downward spiral of your score and help rebuild your financial reputation and damaged credit rating.
Myth #4: All Debts Can Be Discharged with a Chapter 7
Not all types of debts can be discharged as part of a Chapter 7 bankruptcy. Balances on student loans, back child support, and outstanding taxes from previous years are all examples of debt that the court cannot wipe out except under a narrow set of circumstances. It’s usually unsecured debts like medical bills, credit card balances, and payday loans that can be discharged using this form of bankruptcy.
If you have debt that cannot be discharged as part of a Chapter 7, there’s still the option of looking into a Chapter 13 filing. In a Chapter 13 bankruptcy, the court establishes a repayment process that focuses on secured and priority debts. Over three to five years, you’ll pay off those debts and possibly part a small percentage of non-priority debts based on what you can afford to repay. Once you complete the court’s approved plan, any remaining debt is discharged.
There are more myths about bankruptcy. Talk with a bankruptcy attorney and get information that’s reliable. After that initial consultation, you’ll know if bankruptcy is right for you and how to move forward.