Being faced with a bankruptcy is a stressful, worrisome time. People may feel shame or embarrassment for having to file for bankruptcy, and many worry about losing everything they own in an effort to pay off their debts.
The information surrounding bankruptcy can be overwhelming and confusing even at the best of times, but often it gets mired down with assumptions, myths, and flat-out lies that have cropped up around something many people deem as “scary.”
Bankruptcy is not a moral failing, and it’s certainly not the end of your professional or personal life. By seeing the truth behind these various bankruptcy myths, you’ll be able to fight the fear and find the best path for your situation with the help of creditors, attorneys, and other financial professionals.
Myth: Bankruptcy Automatically Means You’ll Lose Everything
Actually, it doesn’t. While losing assets is a common method of repaying debts in a Chapter 7 bankruptcy, you won’t lose any of your assets if you’re able to apply for a Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, you’ll be able to work with your creditors to create a payment plan for you to pay off your debts in 3 – 5 years by making monthly payments. Different debts have different priorities, and it may still be beneficial for you to sell off personal assets in order to get debt paid faster, it’s an optional way of making your way out of whatever debt you’ve found yourself in.
Myth: Chapter 7 Bankruptcy Means the Bank Will Take Every Asset You Own
It does not mean that! Certain things are exempt from a Chapter 7 bankruptcy, including your primary home and vehicle, household goods and everyday items like televisions and computers, health aids, burial plots, and savings accounts such as retirement and 401(k) savings. They also can’t claim any of your Social Security benefits, either.
In fact, you can work with your attorney to shield specific assets you want to keep in various ways, including setting up an LLC or distributing your wealth to family members.
Myth: Asset Shielding Means You’ll Lose Nothing in a Chapter 7 Bankruptcy
That is…also not true. While some people can manage to shield their mansions and yachts, it’s not very common. Unessential luxuries that are completely paid off–ranging from smartphones to a fleet of cars to giant plots of property–are able to be sold off to pay off your debt, so they will be seized and sold.
Myth: You’ll Never Be Able to Buy a Car or House Again
This is one of the biggest worries people face when they debate whether they want to file for bankruptcy, but the truth is that you will absolutely be able to file for loans again after declaring bankruptcy. Some people are able to secure car loans immediately after declaring bankruptcy, and you’ll be able to apply for a mortgage within a few months.
However, while it’s possible to pull a loan out if you really need one, you’ll want to think about how much you actually need it. Your credit score will take a hit–one that you’ll be able to remedy, but it will take time–and because of that, the interest rates on your loans will likely be very, very high. It may be better to rent for a while if you can.
Myth: You Should Max Out Your Credit Cards Before Filing for Bankruptcy
It should be obvious why this is a bad idea, but there’s some twisted logic to this method of thinking. After all, since bankruptcy erases your credit card debt, surely maxing out your credit card won’t hurt, right? Wrong!
If you spend recklessly before going to court for bankruptcy, the court considers that fraud. That means at best, your appeal will be discharged–which means you won’t get any of your credit forgiven–or at worst, you’ll find yourself with fines and possibly even a criminal conviction. Plus, on top of that, any money used for fraudulent purposes cannot be included in debt dismissal.
Instead, focus on minimizing your debt and scaling back your spending before declaring bankruptcy. Trust us, it will help in the long run.
There’s a lot of uncertainty that comes with declaring bankruptcy, but know that not everything you hear is true. By keeping the truth behind these myths in mind, you’ll be able to navigate an undoubtedly confusing and overwhelming time, and you’ll be able to better situate yourself to get out of debt–for good.