Bankruptcy can be an escape route if you’re drowning in debt. Bankruptcy can give you some financial relief by allowing you to discard or repay debts, but it can also severely damage your credit, causing your score to plummet.
Bankruptcy is unfortunately surrounded by a number of misconceptions and myths. Below are five of the most common myths surrounding bankruptcy.
1. Myth – Bankruptcy Erases all Debt
The most common belief is that, no matter what kind of debts you have, they will all be erased during the bankruptcy process. There are some types of debts that can’t be wiped clean by bankruptcy, but bankruptcy can help you discharge and pay off others.
Generally, child support, alimony, tax debts, and student loans cannot be discharged through bankruptcy. If you’re considering bankruptcy to get rid of these types of debt, reconsider.
2. Myth – Discharged Debts Will No Longer Hurt Your Credit Score
Surely, if a debt is discharged in bankruptcy, it is also removed from your credit report and no longer affects your credit score. This is not the case.
Even debts that are discharged or cleared through bankruptcy will remain on your credit report and affect your credit score for seven to ten years. Over time, their impact will lessen, and eventually they will disappear altogether.
3. Myth – You’ll Lose All Your Assets
There is a common myth that those who file for bankruptcy lose everything. In most cases, you should be able to keep much of your property.
Bankruptcy does not necessarily mean you will lose your house, vehicle, and all your other assets. Although you may have to liquidate some of your property, you can declare exemptions for daily necessities, such as your home. Some of your possessions may not appeal to your creditors because they are not valuable enough.
A Chapter 7 bankruptcy is a no-asset case, meaning no property or cash is turned over to creditors. Chapter 13 bankruptcy allows you to keep your assets, but the value of your assets is used to calculate a repayment plan.
4. Myth – Bankruptcy Affects Everyone the Same
Although you may have heard it, bankruptcy does not affect everyone’s finances and credit equally. If you know someone who has gone through bankruptcy, it doesn’t mean your outcome will be the same.
The outcome of bankruptcy depends on a number of factors, including the severity of your debt, the number of debts, the types of debts, and your credit score. If you have a relatively low amount of debt tied to only a few accounts, your credit score won’t be affected as much as someone with more severe problems.
5. Myth – Bankruptcy will Ruin Your Life Forever
A bankruptcy filing will not permanently mark you with a scarlet “B.” Over time, your finances and credit can recover from bankruptcy.
During the next seven to ten years, credit will be limited and interest rates will be higher, but the economy will quickly rebound. If you practice good financial habits and take steps to improve your credit, you can begin improving it almost immediately. Until your bankruptcy disappears from your credit report, you can emerge with stronger credit than ever.
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