The decision or whether or not you should file for bankruptcy is never easy. Bankruptcy is a serious financial decision that many people wrongly associate with financial ruin. In reality, bankruptcy helps millions of people eliminate inescapable debt and get their financial lives back on track. Here are three common myths surrounding bankruptcy and the truth behind them:
Myth: You’ll lose everything
One of the biggest misconceptions regarding bankruptcy is that you’ll have to give up all of your possessions to eliminate your debt. This couldn’t be further from the truth. What happens to your debt and property will depend on the type of bankruptcy you file for. In Chapter 13 bankruptcy, or reorganization bankruptcy, individuals are enabled to pay off all or a portion of their debts over a three to five-year period as an alternative to liquidating their assets to pay off debt.
Chapter 7 bankruptcy, or liquidation bankruptcy, is the most common type of bankruptcy in the U.S., but it will require you to sell off some of your assets to discharge your debts. Fortunately, many of the necessary assets for your day-to-day life, such as your home or car, are usually exempt from liquidation.
Myth: All of your debts will be relieved
While both Chapter 7 and 13 will eliminate most forms of debt, there are some exceptions. While your attorney can let you know which of your specific debts are non-dischargeable, you will still be responsible for paying off the following debts:
- Student loans
- Child support or alimony
- Back taxes
- Court fees and penalties
- Homeowner association fees
Myth: Paying off your debts is always a better option
Filing for bankruptcy is a significant decision with long-lasting consequences, but that doesn’t mean it’s a bad idea. While your credit score will take a hit and you will have a record of your bankruptcy on your credit score for seven to 10 years, most people can start to rebound relatively quickly after filing. If your debts exceed 50% of your income and you don’t have the budget to pay them off within the next five years, bankruptcy is probably ideal for you.
Don’t let common misconceptions about bankruptcy prevent you from seeking the relief you need. If you are facing insurmountable debt, Chapter 7 or Chapter 13 bankruptcy may be right for you.