5 Common Misconceptions About Filing For Bankruptcy

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.”

The Difference Between Chapter 7 & Chapter 13 Bankruptcy


Filing for bankruptcy can be an overwhelming process. You know there are multiple chapters of bankruptcy, but which one is right for your situation? Attorney Xue Connelly breaks down the differences between the two most common types of bankruptcy for individuals: Chapter 7 and Chapter 13.

What Is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a debt forgiveness plan which typically lasts between four and six months. It involves asking the bankruptcy court to dismiss the majority of your debts with some exemptions, such as taxes, alimony and child support. In return, non-exempt assets will be turned over to the bankruptcy trustee, and then sold and distributed amongst your creditors.

Do I Have Any Asset Protections Under Chapter 7 Bankruptcy?

“Most Chapter 7s are no asset cases, meaning the assets you do have are protected by state law exemptions that apply,” says Connelly. “For example, 100% of retirement plans are exempt from a Chapter 7 trustee which means even after filing a Chapter 7 you’ll keep your retirement plan. There’s also an exemption for a certain amount of money for your personal property. Then there are exemptions that range from very personal things to the items you need in order to start your new life after filing a Chapter 7 — whether that’s clothing, your wedding ring or your family Bible.”

“In Virginia, there’s also a homestead exemption,” Connelly explains. “It’s a general exemption that allows an individual to use it for whatever they want for up to $5,000. And if you’re over 65 the exemption allows for up to $10,000.”

Who Can File For Chapter 7 Bankruptcy?

“Chapter 7 bankruptcy is limited to individuals who make a certain amount of income and if you make over that amount, you are no longer eligible to file a Chapter 7 and will need to consider a Chapter 13 instead,” Connelly explains.

What Is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy, on the other hand, is both a debt forgiveness plan and a debt repayment plan that can last between three and five years.

What Happens During Chapter 13 Bankruptcy?

“In a Chapter 13, the bankruptcy court assesses all your assets and income and based on your existing debts determines a percentage ranging from 1% to 100% to pack back your creditors. The court breaks it down into sixty payments over the course of three to five years so you’re paying the trustee once, instead of looking for five or ten different payments to different credit cards,” says Connelly.

Why Would I Choose To File For One Form Of Bankruptcy Over The Other?

Connelly says one reason you might file a Chapter 13 bankruptcy rather than a Chapter 7 is if you are behind on paying your mortgage. “Chapter 13s allows you to catch up on your payments. Let’s say you owe a back-mortgage of $50,000. With a Chapter 13, you can pay that back over five years while keeping your home and equity in the property. Whereas a Chapter 7 will stop a foreclosure initially, however, you will eventually lose the house unless you can pay back the mortgage completely.

What Paperwork Do You Need To Prepare To File Bankruptcy?

Nobody likes paperwork. But if you plan to file for bankruptcy it’s key to be prepared with the right documentation. Bankruptcy attorney Xue Connelly shares her expertise on what documents you need to gather before meeting with a lawyer.

Collect All Of Your Bills

“When you’re coming in to consult with an attorney regarding a bankruptcy, bring all of your bills,” says Xue Connelly. “That includes credit card bills, medical bills, and any other expenses you have. Whether they are opened or unopened, bring them with you and the attorney can sort through them with you.” The more documentation you have, the better.

Bring Your Credit Report

“One misconception about credit reports is that they include a comprehensive list of every record you have, which is not the case,” explains Connelly. “However, they do provide a good snapshot of what you owe and what bills you need to look at when filing for bankruptcy.”

Gather Your Pay Stubs

“Providing your attorney with at least four to six months of pay stubs will give them a good idea of what they’re working with and will allow them to come up with a plan for filing for bankruptcy,” says Connelly.

Come Prepared With Documentation Of Any Pending Lawsuits

Connelly says, “If you have any garnishments or lawsuits pending against you, you will want to share documentation on those with your attorney in your initial conversation as well.”

Thinking about filing for bankruptcy can be overwhelming. “Often, when someone is in a situation where creditors are calling and they don’t have enough money to pay them, they will stick their head in the sand, ignoring calls or not opening mail. It’s understandable,” says Connelly. “But if you plan to file for bankruptcy, you will need that paperwork. An experienced attorney will be happy to go through all your documentation with you and put together a plan to help you get out of that situation.”

About the Author

This is a photo of Xue Connelly. She is a bankruptcy and estate attorney at Old Town Lawyers.

Xue Connelly

Xue Connelly is an attorney at Friedman, Grimes, Meinken & Leischner PLLC, concentrating on planning and controversy matters involving estates and trusts and bankruptcy. Ms. Connelly has been named a 2023 Virginia Legal Elite, a Super Lawyer “Rising Star” in Northern Virginia and Washington D.C., and a 2023 Best Lawyer “Ones to Watch” by U.S. News & World Report.