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Bankruptcy Myths BUSTED: Separating Fact From Fiction About Financial Fresh Starts
Don’t let misconceptions hold you back. Discover the truth about bankruptcy and how it can help you regain control of your finances.
Debt. It’s a four-letter word that evokes feelings of stress, anxiety, and maybe even a little bit of shame. And when people feel overwhelmed by debt, they often turn to bankruptcy as a potential solution. But…bankruptcy is also shrouded in myth. You’ve likely heard stories—maybe from well-meaning friends, relatives, or even outdated sources online—that paint a grim picture of ruin and devastation.
But are those stories accurate? Probably not. In this article, we’re taking aim at the most common bankruptcy myths, armed with facts, clarity, and a healthy dose of skepticism. Prepare to have your assumptions… BUSTED!
Myth #1: Bankruptcy Means You Lose Everything.
This is perhaps the biggest, most pervasive myth surrounding bankruptcy. The image of losing your home, your car, your cherished possessions – it’s terrifying. But thankfully, it’s rarely true. Bankruptcy laws actually protect certain assets.
It’s true that Chapter 7 bankruptcy is liquidation, and they really can take things. However, most states have “exemptions” – specific property you’re allowed to keep during bankruptcy. These exemptions vary by state but generally include things like your home (up to a certain value and the California homestead adjusts with inflation), essential personal property (furniture, clothing, tools), retirement accounts, and vehicles (in California we have a wild card exemption).
Also, they don’t take things in Chapter 13 bankruptcy, even if you would have lost those things in Chapter 7 (post-confirmation assets are their own issue). Filing Chapter 13 is a helpful strategy to protect assets and make the case much less stressful since as a rule, you keep all your stuff as long as you continue to pay for your house and cars. Why? Because you don’t get a free car or house in bankruptcy.
While you might have to surrender some non-exempt assets, the vast majority of filers retain their homes, cars, and enough belongings to live comfortably. Worst case: think of it as streamlining, not annihilation.
Myth #2: Bankruptcy Will Ruin Your Credit Score Forever and You’ll Never Get Credit Again
Okay, let’s be honest: bankruptcy will negatively impact your credit score, at least initially. It stays on your credit report for up to 10 years. However, it doesn’t ruin your credit forever. In fact, for many people drowning in debt, bankruptcy can actually improve their credit score over time.
Why? Because bankruptcy eliminates outstanding debts, meaning there’s no longer anything to pay. This allows you to start rebuilding your credit after bankruptcy with new, manageable obligations. Plus, the immediate negative impact is often less damaging than continuing to struggle with overwhelming debt, which can lead to missed payments and further credit damage.
While it’s true that obtaining credit immediately after bankruptcy might be challenging, it’s certainly not impossible. Many people successfully rebuild their credit within a year or two. Secured credit cards (cards backed by a deposit) are a great way to start, as are installment loans with reasonable terms.
With disciplined spending and timely payments, you can demonstrate your creditworthiness and gradually regain access to credit. Remember, bankruptcy is a fresh start – an opportunity to build a stronger financial foundation.
Think of it like this: your credit score is a reflection of your financial health. Bankruptcy is sometimes the emergency surgery needed to stabilize things so you can heal and rebuild.
Myth #3: Only “Bad” People File for Bankruptcy.
This one is particularly harmful and untrue. Filing for bankruptcy isn’t a sign of moral failing; it’s a legal process available to anyone facing insurmountable debt. Life happens! Job loss, medical emergencies, business downturns, pandemics, divorce, unexpected expenses—these are all circumstances that can lead to financial hardship, regardless of how responsible or hardworking you are.
Bankruptcy is simply a tool to help you get back on your feet when life throws you a curveball. It’s not about being “bad”; it’s about making a smart decision to protect your future. Seriously, don’t let shame keep you from exploring a viable solution.
Myth #4: The Bankruptcy Process Is Complicated and Confusing.
Okay, admittedly, the bankruptcy process can seem daunting. There’s paperwork, court appearances, and legal jargon involved. But it doesn’t have to be overwhelming. When I first started helping people over 20 years ago, I found myself scratching my head almost every case.
You have options! You can represent yourself (pro se), and you’re on your own and if you choose the wrong chapter or exemptions, you can lose things. Many people choose to work with a qualified bankruptcy attorney. An attorney can guide you through the process, ensure you understand your rights, and maximize your chances of a successful outcome. Plus, they can handle the complex paperwork and legal requirements on your behalf. Most of us have flexible payment plans.
Myth #5: Bankruptcy Only Benefits Large Corporations.
Another misconception! While large corporations sometimes utilize bankruptcy, the vast majority of bankruptcy filings are filed by individuals and families seeking debt relief. In fact, individual bankruptcies far outnumber corporate bankruptcies. This isn’t just for the big guys; it’s designed to help everyday people like you and me.
Myth #6: If You File For Bankruptcy, Your Friends & Neighbors Will Know.
Your privacy is protected during the bankruptcy process. While bankruptcy records are public record, they usually aren’t actively broadcasted to your community. Unless someone specifically searches for your bankruptcy filing, they likely won’t know. Moreover, many people find support from friends and family after going through bankruptcy, recognizing it as a courageous step towards financial freedom.
Myth #7: I Can’t Afford to File Bankruptcy Because I Can’t Afford My Debts
It’s true that it may seem like a paradox. How can I afford bankruptcy and a bankruptcy attorney if I can’t afford to repay my credit card bills? The truth is that millions of people file bankruptcy each year, and most have no money to repay anything beyond their reasonable and necessary household living expenses.
The way this is affordable is two-fold: first, you can file bankruptcy without an attorney and the filing fee is a few hundred dollars and in some cases, even that can be waived. Filing bankruptcy isn’t recommended for many people, since it can be daunting, and if you choose the wrong chapter or exemptions you can lose things.
Second, filing bankruptcy is affordable because bankruptcy lawyers offer payment plans. I’ve stayed in business for over two decades specializing in bankruptcy. And, all of my thousands of clients each had financial struggles. Yet, we all find ways to make it work. A skilled bankruptcy attorney can find a way to accept flexible payments from you also.
Ready to Bust Your Debt?
Bankruptcy isn’t a magic bullet, but it can be a powerful tool for regaining control of your finances. If you’re struggling with overwhelming debt, don’t let myths and misconceptions hold you back from exploring your options. If you’re in the Los Angeles County area, contact me and let’s set up a no-pressure meeting and strategize how best to bust your debt.
Disclaimer: This article provides general information and should not be considered legal advice. Consult with a qualified bankruptcy attorney to discuss your specific situation.
