Many people think if they file for bankruptcy they’ll lose everything, be considered a failure, and won’t ever be able to build their credit back up again. However, that’s just not the case. Attorney Xue Connelly shares five common misconceptions about filing for bankruptcy.
Misconception #1: If you file for bankruptcy, you’ll lose everything.
“The majority of cases filed under chapter 7 in bankruptcy are no-asset cases, meaning all assets are protected,” explains Connelly. “Generally, for anybody coming into a bankruptcy, the majority of things will be protected, so you don’t have to worry about losing all of your prized possessions — like your car, house and retirement benefits,” says Connelly.
Misconception #2: A bankruptcy applies to all of your debts.
“Unfortunately, you can’t can’t walk away from of all of your debts in either a chapter 7 or a chapter 13 bankruptcy, as there are some debts Congress protects,” says Connelly. The most common protected debts include:
- Back taxes
- Spousal support
- Child support
- Any debts incurred because of fraud
Misconception #3: You should spend years trying to pay off all of your debts instead of filing for bankruptcy.
It’s common for people to spend years trying to catch up to debts that are out of control, before finally breaking down and filing for bankruptcy. Then, as soon as they file, they start to feel the relief of severe stress associated with such a precarious financial situation. “Bankruptcy exists for a reason,” says Connelly. “It’s there to help people who have lost control of their financial situation for whatever reason that may be.”
Misconception #4: Filing for bankruptcy is a personal failure.
Connelly explains, “Filing for bankruptcy is not a character flaw, and bankruptcy isn’t just caused because of a mismanagement of finances.” In fact, the majority of bankruptcy cases in the U.S. are due to rising medical costs and unexpected job loss — crises that people did not anticipate and were not prepared for.
Misconception #5: Bankruptcy will ruin your financial future.
“If you file for bankruptcy your credit is going to take a hit. There’s no way around it. But it’s not going to be to be bad forever,” says Connelly. “The purpose of bankruptcy is to provide a fresh start. Whether you file a chapter 7 or a 13, you’ll see that things start to turn around pretty quickly. First, you’re protected by the bankruptcy court so you can’t be harassed by creditors. You don’t have to worry about a lawsuit or about immediately losing your house. Secondly, you can start rebuilding your credit and get access to the right financial tools to begin anew almost immediately after filing the bankruptcy petition.”