Published in: Banks | Aug. 23, 2019
3 Bankruptcy Myths You Shouldn't Believe
By: Maurie Backman
Before you think about filing for bankruptcy, get the truth about what it entails.
If you’re struggling to keep up with your debt, you may be contemplating the idea of filing for bankruptcy. But if you’re going to do so, it’s important to know what you’re signing up for. As such, you can’t afford to buy into the following myths.
1. It's easy to qualify to file for bankruptcy
There are two types of bankruptcy filing you might pursue: Chapter 7 and Chapter 13. Chapter 7 is a personal liquidation, in which your assets are effectively sold off to make your creditors as whole as possible. Chapter 13, meanwhile, is a personal reorganization, and during the process, you repay your various debts over time.
Qualifying for Chapter 13 is much easier than qualifying for Chapter 7. That's because in order to be eligible to file for Chapter 7, you must pass what's known as the means test. The means test measures whether your income is lower than the median income in your state for a household your size. If it is, then you’re generally allowed to file for Chapter 7. If not, you can file for Chapter 13 instead. Otherwise, you’ll need to wait six months and take the means test again.
2. All of your debts will be eliminated in bankruptcy
Many people file for bankruptcy because they can't keep up with their existing bills and want a way to shake off that debt for good. But depending on the nature of your debt, that may not be possible.
Generally speaking, you can get rid of your outstanding credit card debt, personal loan debt, and medical bills in a bankruptcy proceeding. You can't, however, use bankruptcy to get out of paying back taxes you owe the IRS, paying alimony, or paying child support. And if you owe money in the form of student loans, you're out of luck, as those typically aren't dischargeable through bankruptcy, either. Only in rare circumstances can you shake your student debt by filing, and you need to be able to prove that you'll effectively never be in a position to pay back your lenders, which is hard to do.
3. Filing for bankruptcy is no big deal
If you're in a situation where your debt has gotten out of control and you don't see a reasonable way of keeping up with it, then you may have no choice but to file for bankruptcy, and that's not something to beat yourself up over. But don't kid yourself into thinking that filing won't come with repercussions.
A Chapter 13 bankruptcy filing will stay on your credit report for seven years. Meanwhile, a Chapter 7 will remain on your record for 10 years. During that time, you may have a hard time borrowing money when you need to, whether it's in the form of getting a mortgage, an auto loan, or a new credit card. Furthermore, having poor credit could make it difficult for you to get approved to rent a home or even get a job.
Therefore, don't rush to file for bankruptcy before you've explored your other options for dealing with your debt. You can always try negotiating with your creditors directly and working out new payment plans that allow you to more reasonably pay back the money you owe. Or, you can enlist the help of a debt settlement company, or even an attorney, to negotiate on your behalf. Doing so could end up being less expensive than going through the actual bankruptcy process.
The bottom line on bankruptcy
Although it is possible to recover from bankruptcy, the process can be lengthy, stressful, and costly. And that filing could end up haunting you for years after the fact. If you have no choice but to file for bankruptcy, talk to a lawyer and see whether Chapter 7 or Chapter 13 makes the most sense. At the same time, explore your other options for debt relief before putting yourself through that process, because in many cases, you’re better off avoiding bankruptcy if it’s at all possible.
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