Bankruptcy is not just a legal process, but also a deeply emotional and personal decision that affects the lives of millions of people. Unsurprisingly, it is also one of the most misunderstood concepts in personal finance, and many myths and misconceptions continue to circulate about it. Here are ten common myths about bankruptcy that need to be debunked:
1. Myth: Bankruptcy is always a last resort.
Reality: While it may be true that filing for bankruptcy should not be taken lightly, it is not always a last resort. In many cases, bankruptcy can be the best option for people who are struggling with overwhelming debt that cannot be repaid in any other way.
2. Myth: Bankruptcy will ruin your credit forever.
Reality: While filing for bankruptcy will have an impact on your credit score in the short term, it will not ruin your credit forever. With time, effort, and smart financial management, you can rebuild your credit and achieve a good score in the future.
3. Myth: Bankruptcy is only for irresponsible people who spend more than they can afford.
Reality: Bankruptcy is not a moral judgment on a person’s character or behavior. Many people file for bankruptcy due to unexpected life events such as job loss, divorce, medical bills, or natural disasters that have put them into debt beyond their control.
4. Myth: You will lose everything you own in bankruptcy.
Reality: Bankruptcy laws provide exemptions for certain types of property that are protected from liquidation. In addition, many people can use bankruptcy to reaffirm their debts and keep their homes, cars, and other assets.
5. Myth: Bankruptcy is a quick fix that will erase all your debts.
Reality: While bankruptcy can help you discharge certain types of debts, such as credit card balances and medical bills, it will not wipe out all your obligations. Some debts, such as student loans or taxes, cannot be discharged in bankruptcy.
6. Myth: You need a lawyer to file for bankruptcy.
Reality: While it is advisable to seek legal counsel when considering bankruptcy, it is not a legal requirement. Some people choose to file on their own, using self-help resources and free legal clinics, but this is not recommended unless you have experience in bankruptcy law.
7. Myth: Applying for new credit before bankruptcy is a good idea.
Reality: This is a common mistake that can actually hurt your bankruptcy case. It is important to disclose all your debts and assets to the court, including recent credit applications, to avoid accusations of fraud or deception.
8. Myth: Bankruptcy will affect your employment status.
Reality: It is illegal for employers to discriminate against employees or job applicants based on their bankruptcy status, according to the US Equal Employment Opportunity Commission. However, certain job roles that involve financial responsibility, such as accounting or banking, may be affected.
9. Myth: You can only file for bankruptcy once.
Reality: While there are limitations on how often you can file for bankruptcy, you can technically file multiple times in your lifetime. However, the consequences and eligibility requirements may be different depending on the type of bankruptcy and when you last filed.
10. Myth: Bankruptcy is an easy way out.
Reality: This is perhaps the biggest myth about bankruptcy, and the most damaging. Bankruptcy is a serious legal process that requires careful consideration, planning, and follow-through. It is not a magical solution to all your financial problems, but rather a tool to help you regain control of your finances and start fresh.