Bankruptcy is an emotionally-charged term.
For some it brings about feelings of shame, a reminder of a painful time in life. For others, it gives them a sense of relief knowing that they can have a second chance at a rock solid financial future.
Despite a wide swath of experiences, for most of us, bankruptcy conjures an image of someone who is destitute, left with no alternatives.
I used to think that way. Until I heard a friend of mine share his bankruptcy experience at a seminar.
Given my friend is very successful, I never thought of him as someone who had gone through a bankruptcy. In sharing his story, my friend explained that bankruptcy is a financial tool that can be used to remedy a financial calamity if needed.
It was my friend’s words that made me see bankruptcy in a different light because he didn’t say he hit rock bottom. Instead he shared how he was backed into a financial corner based on some financial decisions he had made.
In the end, my friend recovered and is a highly successful entrepreneur and millionaire.
Like me, you may have heard several myths about bankruptcy that left you with a sour taste in your mouth until you heard my friend’s story. Since knowledge is power, below we dispel five common bankruptcy myths.
But first, a mini-lesson in bankruptcy 101…
Types of Bankruptcies
There are two types of bankruptcies that people typically file: Chapter 7 or Chapter 13.
If you are wondering, these numbers simply refer to guidelines for each as found in their respective chapters of the United States Bankruptcy code.
A Chapter 7 bankruptcy is known as a liquidation bankruptcy because it eliminates all eligible debts. A Chapter 13 bankruptcy is known as a reorganization bankruptcy because this allows you to restructure your debt payments with your creditors to make your payments affordable.
There is also a Chapter 11 bankruptcy, which is typically used by business owners.
In terms of which one is right for you, consulting an experienced bankruptcy attorney is key. Filing the wrong type of bankruptcy for your situation can be a costly mistake, so make sure you are working with a trusted attorney who is a bankruptcy expert in your state (Note: each state has its own set of laws).
5 Common Bankruptcy Myths and Facts Everyone Should Know
You Have to Be a Pauper to File Bankruptcy
Bankruptcy doesn’t discriminate against incomes. You may be earning millions of dollars each paycheck, but if you fail to budget properly, you could wind up in debt.
Filing bankruptcy isn’t cheap either. Filers must pay a filing fee that ranges between $310–$335. Sometimes a Bankruptcy Trustee will charge a $15 or $20 fee. And bankruptcy filers are typically required to obtain credit counseling services or take a financial management course, which can cost between $20 to $100. Those fees add up quickly – and don’t include any fees associated with hiring a bankruptcy attorney.
While filing bankruptcy doesn’t technically require hiring a bankruptcy attorney, in the Los Angeles area for example, the success rate with an attorney is more than 95 percent, compared to the less than one percent success rate for pro se filers.
I Have to Sell My House to File Bankruptcy
Most states allow an individual to keep one home and one car after filing for bankruptcy.
Additionally, you are not required to liquidate all equity in your home. The limits vary by state, and as an example, in the state of Arizona, you are allowed to keep up to $150,000 of equity in your primary residence. That’s probably good news for some people who may be in financial hot water but don’t want to leave the place where they have made memories with their family.
You Can’t Eliminate IRS Debts in Bankruptcy
If you owe back taxes for more than three years, you might be able to write those off in a Chapter 7 Bankruptcy. Other rules apply, so this is where your attorney can advise you.
Bankruptcy Only Impacts You for 7 to 10 Years
While a bankruptcy will remain on your credit report for a fixed period of time, in some cases you will need to disclose your bankruptcy even after the seven to ten-year time period. In other words, your bankruptcy could impact your ability to obtain jobs, security clearances or professional licenses in the future.
If an application asks, “Have you ever filed bankruptcy?” they aren’t asking if it’s on your credit report, they are asking if you have ever filed and the answer will be yes, for the rest of your life. This is why it is not something to be done without considering all of your options.
Bankruptcy Will Cancel All of Your Debts
Bankruptcy will typically eliminate any unsecured debts you have such as credit cards and lines of credit. If you have secured debts like your home or your car, those won’t go away unless you get rid of the asset that is securing the debt. For example, if you want to keep your car and it has financing, you should be able to keep the car (and the debt) assuming you can prove that you can make the payment.
Additionally, student loan debt, child support, certain taxes owed and alimony, are typically not cancelled through bankruptcy.
Should You File Bankruptcy?
Only you can answer this question, which usually requires seeking competent and wise counsel for guidance.
Whatever you decide, know there is life after bankruptcy, but bankruptcy is a permanent mark on your credit, so make sure you have exhausted all of your credit resolution options before making that commitment.
Disclaimer: I am not an attorney, and this should not be construed as legal or financial advice. If you have questions about whether or not bankruptcy is a good option for you, please consult a bankruptcy attorney in your area.