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Misconceptions about Bankruptcy

There are several misconceptions about bankruptcy and the impact it will have on your financial, as well as personal, life. Hopefully this article will help clear up some myths for you.

Myth: Filing for bankruptcy is difficult

Actually, the process isn't all that complicated; especially if you hire a bankruptcy attorney to walk you through all of the proceedings. A bankruptcy attorney isn't even required, although it is highly recommended. There is wealth of information online to get you started.

Myth: Only irresponsible people file for bankruptcy

Half of all bankruptcies are due to overwhelming medical debt. A large percentage of others are due to other life-altering events, such as divorce, loss of employment or reduction in income. People who fit in these scenarios strive for months, if not years, to pay off their debts but cannot seem to climb out on their own; leaving bankruptcy as their only option.

Myth: I'll lose all of my assets

Consumers are afraid that their assets will be repossessed or liquidated to pay off their debts. While bankruptcy laws vary depending on what state you're filing in, each state has exemptions that protect certain assets like your car (up to a certain value), your house, retirement plans, most household goods and clothing. The majority of people who go through bankruptcy proceedings end up keeping everything they have.

Myth: All debts are wiped out in Chapter 7 bankruptcy

Not all debts qualify for discharge. Child support, alimony, government-issued/guaranteed student loans, and debt incurred due to fraudulent actions cannot be included in bankruptcy. In addition, if you have been sued and owe legal settlements, you will still be obligated to pay those debts.

Myth: I can max out all of my credit cards and then file for bankruptcy

As we said, for most people who file bankruptcy, it is due to circumstances beyond their control. However, there are many people who are irresponsible and take advantage of this opportunity for a fresh start. That being said, if you run up your credit cards right before filing, good luck at getting the bankruptcy judge to cooperate; since this is considered fraud. Trustees review all purchases and know what to look for.

Myth: I'll never qualify for credit again

Actually, credit card offers will start showing up in the mail in not time, although, these offers carry very high interest rates. Creditors know recent bankruptcy filers are often desperate for new credit, since all previous accounts have been closed, and they are willing to accept the higher APRs.

It will be a little more difficult getting an auto loan. If you do qualify, again, you will be charged very high interest rates. If you need a new car but are also considering bankruptcy, get the auto loan before filing. The same goes for a mortgage. You will have little chance of getting a home loan after you file for bankruptcy.

Myth: Everyone will know I've filed for bankruptcy

Unless someone likes to browse public records for fun, your bankruptcy case is kept quite private. Your attorney, bankruptcy judge, trustee and your creditors are likely the only ones to know about your bankruptcy.

Myth: You can only file for bankruptcy once

You can file for bankruptcy more than once, but the bankruptcy law that went into effect in October 2005 extended the required time between filings. You can only file for Chapter 7 bankruptcy once every eight years. You have to wait two years to repeat a Chapter 13 filing and four years between a Chapter 7 and a Chapter 13 case.

Just because you can, doesn't mean you should. Multiple bankruptcies are not good for your credit. The purpose of bankruptcy is to help you get back on your feet. Not as a means to wipe out all of your debt just to rack it up again and then absolve yourself of any responsibility to pay it back.