Bankruptcy can make a positive difference in your finances when you are struggling with extensive debt. This is an effective legal option for many individuals, but bankruptcy can still have a bad reputation due to many misunderstandings about it. Separating myths from facts can help you get a clearer picture of what bankruptcy can do and why you may consider it to improve your specific situation.
If you have more questions after reading this blog, or if you are ready to file for bankruptcy, attorney Mark A. Bandy invites you to schedule a free in-person or virtual consultation.
#1 Fact: Bankruptcy Stops Creditor Harassment
One of the key benefits of filing for Chapter 7 or Chapter 13 bankruptcy is to put an end to debt collection and collector harassment. When you file for bankruptcy, you receive automatic protection, also known as the automatic stay. If a collection agency or a collector’s attorney persists in contacting you, the Federal bankruptcy laws allow you to file a lawsuit against them.
#2 Myth: Bankruptcy Is the Only Debt Relief Solution
Although bankruptcy helps many people, it does not benefit everyone. If your situation is not a great fit for bankruptcy, you should speak with an attorney who specializes in debt relief to explore other solutions.
Alternatives to bankruptcy include:
- Debt settlement to reduce the principal you owe and negotiate a new interest rate and repayment plan that you can afford.
- Debt consolidation to organize multiple debts into fewer loans to help you repay what you owe.
- Refinancing loans such as mortgages or car loans to improve their terms and monthly payments.
- Credit counseling through a reputable nonprofit agency that can help you negotiate any of the above options and build healthier financial habits.
#3 Fact: Bankruptcy Cannot Discharge All Types of Debt
Chapter 7 and Chapter 13 bankruptcy can create a clean slate for many different types of debt. However, it is important to understand that bankruptcy cannot discharge every debt you have.
Bankruptcy cannot erase the following debts:
- Student loans
- Most federal, state, or local taxes
- Child support
- Debts due to fraud you have committed
- Debts you did not include when filing for bankruptcy
Bankruptcy can generally forgive debts due to personal loans, utility bills, credit cards, and medical bills. If you are unsure whether your debt is eligible for bankruptcy, you can discuss it with your attorney before filing.
#4 Myth: Both Spouses Must File for Bankruptcy
A married couple can file for bankruptcy either separately or jointly. It is not uncommon for only one spouse to have higher debt, in which case filing separately makes the most sense. Whether you are both responsible for the debt accumulation or not determines how you file for bankruptcy.
Another misconception many people have is that if one spouse files for bankruptcy, it will impact the other’s credit score. Whether you file for Chapter 7 or Chapter 13, your individual bankruptcy status typically does not affect your spouse’s credit.
#5 Fact: You May Lose Some of Your Possessions
This depends on which type of bankruptcy you file for. Bankruptcy also includes exemptions for day-to-day items, although those provisions can vary depending on your state of residence.
Chapter 7 bankruptcy can put luxury goods, including yachts and vehicles, up for auction to cover your debts. Chapter 13 usually does not require you to let go of your belongings but will take their value into account to determine your repayment plan.
#6 Myth: You Can Only File for Bankruptcy Once
When you file for bankruptcy, you usually mean it to be a one-time occurrence. Life happens and you may find yourself under the strain of debt again in the future. The good news is that you can file for bankruptcy again if this solution can help you reorganize your finances.
You need to meet specific conditions to file for bankruptcy another time, and you may want to consider alternatives to avoid damaging your credit rating. If you meet the other requirements, you can file for Chapter7 once every eight years and for Chapter 13 once every couple of years. However, most Chapter 13 repayment plans take three to five years to fulfill.
#7 Fact: Bankruptcy Laws Protect Your Civil Rights and Government Benefits
Federal bankruptcy laws ensure that you can:
- Apply for student loans and government grants
- Receive Social Security and unemployment benefits
- Continue to vote
- Hold professional licenses
When filing your bankruptcy, most lawyers and financial professionals recommend that you do not use your 401(k) to reimburse creditors. Federal law also protects this type of account, so your bankruptcy status does not interfere with your retirement plans.
#8 Myth: Bankruptcy Is a Personal Failing
Some people still associate bankruptcy with moral and financial failure. In reality, many individuals who end up in great debt and choose bankruptcy to improve their lives are in this situation due to external factors. Whether you have lost your job, gone through a difficult divorce, or are dealing with health issues and expensive medical bills, you should not feel ashamed of filing for bankruptcy.
Seeking debt relief is a proactive approach to improving your finances and shows great character. Bankruptcy can help you and your family build a secure future with healthy finances and more opportunities.
#9 Fact: You Can Rebuild Credit and Have a Stable Financial Future
Bankruptcy does not ruin your credit. While it remains on your credit history for seven to ten years depending on which type you file for, it allows you to start rebuilding it almost as soon as your bankruptcy application is approved.
You can expect to have more limited opportunities for credit and pay higher interest rates for a while, but this is part of the process of reestablishing trust with financial institutions. Another way you can improve your credit rating after bankruptcy is by making all necessary payments on time.
#10 Myth: You Do Not Need an Attorney to File for Bankruptcy
Bankruptcy is not a complicated process and does not technically require you to have a lawyer to file for it. However, working with an attorney with extensive experience in bankruptcy and other debt relief solutions can make a positive difference. If you are looking for financial counseling, your attorney can also help you find a qualified agency.
Your lawyer can carefully assess your situation and make sure that bankruptcy can help you in the short and long terms. They can help you prepare all necessary forms and educate you on what your obligations and rights are depending on whether you file for a Chapter 7 or Chapter 13 bankruptcy.
If you need a trusted bankruptcy attorney in Savannah or its surrounding areas, contact The Law Offices of Mark A. Bandy, PC, today at (912) 331-4501 to schedule your free consultation!