DEBUNKED: TOP 8 MYTHS ABOUT BANKRUPTCY
Updated: Apr 15
Bankruptcy is one of the most widely misunderstood areas of law—which is a shame, as bankruptcy can be a powerful legal tool when used appropriately. Many people avoid bankruptcy at all costs, while others file it too soon, or without proper guidance.
For the most personalized recommendations, get in touch with our team at US Legal Group, APC. We can clarify misconceptions and help you take full advantage of the debt-relief strategies at your disposal. In the meantime, we have compiled some of the most common myths about bankruptcy—read on to learn the truth.
Myth #1: Bankruptcy will destroy my credit forever.
Most likely, bankruptcy will negatively impact your credit. You may not be able to take out loans at low-interest rates or buy a home right after you file.
However, the effect of bankruptcy on your credit report will decrease over time. In other words, the more time passes after your case, the less it will impact your ability to obtain credit or take out new loans. Furthermore, many people who file bankruptcy already have severely damaged credit. Because of the debt discharge, bankruptcy can quickly improve their scores simply because their credit limits are no longer maxed out.
Additionally, the length of time bankruptcy remains on your report depends on the type of bankruptcy you file. Chapter 7 bankruptcy remains for 10 years, for example, while Chapter 13 remains for only 7 years.
Myth #2: I will lose all my possessions if I file bankruptcy.
Generally, bankruptcy is intended as a fresh start. It is not supposed to leave a filer with anything to their name. What the bankruptcy court may take from a filer depends on many factors, including the type of bankruptcy they file, the value of their assets, the type and amount of debt they owe, state exemption laws, and more.
For example, let’s say you file Chapter 7 bankruptcy in California. Chapter 7 involves a liquidation (i.e. sale) of assets to repay creditors, but exemption laws allow you to protect certain possessions or cash equivalents from this process. While some states allow you to choose between state and federal exemptions, California requires you to use state exemptions.
Here are just a few examples of California exemptions:
Up to $75,000 in home equity
Up to $3,325 in a motor vehicle
Any health aids
Most public benefits
Up to $8,725 in tools of your trade
When you file bankruptcy, you can choose to exempt the above assets and more. The trustee will take any nonexempt assets and sell them to pay your debt. After this process, the court can discharge (i.e. eliminate) any remaining unsecured debt.
If you file Chapter 13 instead, you will have 3-5 years to repay debt using your disposable income. Whatever unsecured debt remains after you complete this plan can be discharged. Chapter 13 does not involve liquidation, which means you can keep your possessions (so long as you complete the plan AND you are caught up on regular payments by the end of the plan).
Myth #3: My business will not survive bankruptcy.
While some will lose their business if they file, this isn’t always the case. Business owners have several bankruptcy options that may allow them to restructure and reduce debt without going out of business.
Congress created Chapter 11, for example, specifically for this purpose. Just this year, they added Subchapter V to Chapter 11, which offers several benefits for qualifying small businesses.
If you are a sole proprietor, you can file almost any type of bankruptcy and potentially rescue your business from financial ruin.
Myth #4: Bankruptcy will wipe out all of my debt.
Unfortunately, this is not always true.
Generally, bankruptcy can only discharge unsecured debt, such as:
Credit card debt
Past-due utility bills
Secured debt, however, is not dischargeable. This is any type of debt that is backed by collateral, such as mortgages, vehicle loans, and more. In some cases, the court may “cramdown” a secured loan (i.e. eliminate interest to reduce the loan to the principal).
Bankruptcy very rarely discharges student loans or tax debt, although it is possible. Child support, alimony, criminal fines, and penalties are not dischargeable.
Myth #5: Bankruptcy won’t stop creditors from suing you.
All forms of bankruptcy trigger a court order called the automatic stay, which prohibits creditors, lenders, and debt collectors from attempting to collect your debt in any way.
The automatic stay can stop all the following:
There are a few exceptions to this protection, such as if you file twice in one year. Your creditors can also collect any debt that is not within your bankruptcy estate.
Myth #6: I won’t qualify for bankruptcy if I have a regular income.
Bankruptcy is not just for those with little to no income. If you make enough each month to pay your bills, but there is no way you will be able to repay your debt in a reasonable amount of time, bankruptcy might still be an option for you.
Chapter 7 is generally reserved for filers who make less than their state’s median income for a household of their size. If you don’t meet this requirement, you can most likely file Chapter 13, which involves a 3-5-year repayment plan. Chapter 13 doesn’t have an income limit, but you can only qualify if you owe less than a certain amount. If you owe more than this, and you make too much to qualify for Chapter 7, you may be able to file Chapter 11 instead.
Myth #7: It’s just a better idea to keep paying my debt.
This idea is an overgeneralization. While some would likely save time and money by simply paying down their debt over several years, others cannot be reasonably expected to do so. The best thing you can do is carefully assess your financial situation, your future prospects, and your bankruptcy options—especially with the help of a professional.
Myth #8: Bankruptcy is morally wrong.
Many people avoid bankruptcy not because they are afraid of losing their assets but because they feel it isn’t honest.
Bankruptcy, however, has been a legal form of relief for centuries. It’s even referenced several times throughout the Bible. The foundation of bankruptcy is the idea that anyone—no matter how hardworking or responsible—can become overwhelmed by debt due to circumstances outside of their control. Even those who are facing financial ruin as a result of honest mistakes should, according to bankruptcy law, be given a second chance.
If you are struggling to make ends meet because of debt, you deserve the opportunity to take advantage of these laws. Financial hardship can hurt your mental health and prevent you from caring for yourself and your loved ones. If you qualify for bankruptcy, it is something to seriously consider. Hundreds of thousands of Americans obtain fresh starts through bankruptcy every year.
Let Us Help You Achieve Financial Freedom
At US Legal Group, APC, we are fully prepared to help you find a solution to unmanageable debt. Our Orange bankruptcy lawyers can clear up misconceptions, answer your questions, address your concerns, and develop a customized plan that accomplishes your financial goals in as little time as possible. When your financial security is on the line, put your case in the best possible hands.