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Popular Bankruptcy Myths and Facts
The idea of bankruptcy evokes strong feelings in many people. Unfortunately, fear and misinformation shape too many emotions when deciding if the process is the right option, resulting in a negative experience. Here are some popular bankruptcy myths and facts to help you make educated decisions about your finances.
Myth: Filing for Bankruptcy Eliminates All of Your Debt
Many people think filing for bankruptcy means all of their debt is eliminated, but that’s just not true. Your requirements to repay specific types of debt depends on the type of bankruptcy you file for.
When you file for Chapter 13, you are put on a structured repayment plan to pay back part or all of your debt but possibly at a reduced interest rate.
When you file for Chapter 7 bankruptcy, unsecured debt, such as loans and credit cards, can be wiped clean, but you will still be required to pay the IRS and things like child support and alimony.
Secured loans, like your mortgage and car loans, may not be discharged when you file for bankruptcy. Also, government-issued student loans are not wiped clean during a bankruptcy, so it’s important to consider how and if the process will benefit you before making a decision.
Myth: You Lose All of Your Belongings When You File for Bankruptcy
Many people think that filing for bankruptcy means they will lose their homes, cars, and other valuable items. While you do have to list all of your notable possessions, and you may have to relinquish some luxury items in order to repay creditors, you’re typically allowed to keep necessary belongings, provided you continue making appropriate and timely payments towards your debt and other bills.
Myth: Bankruptcy Is No Big Deal, and You Can File as Many Times as You Like
Some people may view bankruptcy as no big deal, but that’s also not true. While it may not impact everyone the same way, it can have a very negative impact on your credit score, and it can take a huge toll on your emotions.
While there are no limits on the number of times you can file for bankruptcy, there are waiting periods between your discharge and when you can apply again. For a Chapter 7 discharge, you must wait up to eight years before filing another Chapter 7, and if you file a Chapter 13, you must wait two years to file another Chapter 13, or wait four years to file for Chapter 7 bankruptcy.
If you’re thinking about filing for bankruptcy, understand that it can help relieve you of your debt, but it won’t necessarily fix all financial burdens. A more sustainable approach is learning how to best budget your income for future stability. Learn more about how to manage your finances by checking out our budgeting tips.