For consumers overwhelmed by debt, bankruptcy may seem like the perfect solution. But while it may seem like an easy fix, the repercussions can be significant. Add to that the many myths about bankruptcy, and it can be difficult to know if it’s the right decision.
“Bankruptcy should always be the last resort for people under financial stress,” said Michael Sullivan, personal financial consultant at Take Charge America, a national nonprofit credit and debt management agency. “But if you’ve exhausted your options and are considering bankruptcy, it’s important to understand how the process works so you know what to expect.”
Sullivan shatters seven common bankruptcy myths:
Bankruptcy offers a fresh start. Many people believe that bankruptcy will solve their financial problems and eliminate all their debts. The truth is not so rosy. Many debts cannot be discharged through bankruptcy, including student loans, child support and alimony, penal restitution and fraudulent debts. Additionally, a Chapter 13 filing requires some refund. Bankruptcy is also not cheap, costing more than a few thousand dollars. You should also go through bankruptcy advice before and after your filing.
I will lose everything, even my job. Bankruptcy laws vary from state to state, but each includes exemptions for assets such as homes, vehicles, household items, and retirement savings. In addition, federal law prohibits termination of employment due to bankruptcy.
The spouses must also declare. Depending on whose name is on the debt, the spouses usually do not have to file together. However, if married couples have credit cards or joint debts they will have to deposit together.
Your credit is ruined forever. Although bankruptcy filings stay on your credit report for seven years under Chapter 13 and 10 years under Chapter 7, the effects on your credit diminish over time before your report drops.
I don’t have enough debt to report. Bankruptcy does not require a minimum amount of debt. This is a consideration for people who cannot pay their debts under normal circumstances with their current income. However, due to the administration fees, people with low debt may not see any benefit.
The creditors will continue to harass me. Federal law prohibits debtors from contacting you after you have declared bankruptcy.
I can spend recklessly before bankruptcy and I won’t have to pay it back. Not true. You can get in serious trouble if you do this. Spending with abandon before declaring bankruptcy is considered fraud.
Consumers overwhelmed by debt can find advice with a free online credit counseling session.