During financially uncertain times, it’s understandable that consumers become curious about declaring bankruptcy. For certain consumers with high levels of unsecured debt, bankruptcy can ease the constant worry of how they’re going to pay bills and can be the beginning of gradually rebuilding a solid financial foundation. But one of the persistent myths about bankruptcy is that it’s a quick-fix, clean slate that erases all personal debt. Let’s take a look at that, and other bankruptcy myths.
Myth: Bankruptcy Erases All Personal Debts
The two types of consumer bankruptcy — Chapter 7 and Chapter 13 — eliminate many types of unsecured debt, including credit card debt and medical bills. However, consumers who declare bankruptcy are still responsible for paying back student loans, court-ordered alimony or child support payments and any federal back taxes, as well as certain other government and court fines or penalties.
Myth: You Can Intentionally Run Up Debt, Then Declare Bankruptcy
There’s a popular myth that you can intentionally run up high-limit credit cards, then immediately move to declare bankruptcy so you don’t have to pay. This is not true. Declaring bankruptcy immediately after a spending spree is fraudulent. Any debts incurred fraudulently are not dischargeable in bankruptcy.
Myth: Bankruptcy is the Only Way to Get Out of Credit Card Debt
Consumers facing unmanageable credit card debt often believe bankruptcy is the only way out of making years of minimum payments and seeing little progress. But there are better, less drastic alternatives to bankruptcy, including credit counseling and debt management plans. Together, these two services give consumers the chance to review their full financial picture, start budgeting and work toward paying off credit card debt — in full — usually in five years or less and without bankruptcy’s negative effects on credit.
Myth: The Only Thing You Lose in Bankruptcy is Debt
Many consumers declare bankruptcy thinking they will get to keep all their assets. In reality, the court can require you to forfeit selected non-exempt assets. They are then sold to partially pay back creditors. These can include, but are not limited to: vacation or rental properties, original art, valuable collectibles such as stamps and coins, designer clothing and fine jewelry, and more. So, while declaring bankruptcy may get rid of debt, you also may lose many things that are important to you.
Myth: Bankruptcy Only Affects Me and My Creditors
Before declaring bankruptcy, consumers should review all their debts for co-signers. Any loan that has a co-signer will not be discharged in bankruptcy. Instead, the person who co-signed the loan will be responsible for taking over payments. Your bankruptcy may relieve some of your financial burdens, but it could cause hardship for someone else. It’s important to think through all the potential ramifications of declaring bankruptcy before making any decisions. Consult a qualified bankruptcy attorney to help you understand how it will affect you.