Bankruptcy Myths and Reality

By some estimates, over 1.2 million Americans will file for personal bankruptcy in 2012. Most file for obvious reasons: loss of a job, health care bills, divorce, long-term unemployment. However, the process and consequences of bankruptcy can be confusing and difficult to understand. The greater number of filings has also caused a number of myths about bankruptcy to arise. Misunderstanding the process of bankruptcy can prevent individuals from considering it as a viable option. At the same time, bankruptcy myths also create a false stigma.

What Debts Are Discharged?

Perhaps the most common myth is that bankruptcy discharges all debts. In fact, several categories of debt are not subject to discharge, or can only be discharged in very limited circumstances. Student loan debt, tax liabilities, personal injury restitution, alimony and child support obligations are likely to remain after emerging from bankruptcy. A related myth, that a filer can choose which debts to include, is also false. Bankruptcy involves a comprehensive review of all assets, income and debts.

What Happens to Credit Scores?

Another popular myth is that bankruptcy ruins personal credit. In fact, the effect on a consumer's credit of filing for bankruptcy, while generally negative, varies depending on the circumstances of the case. In many cases, bankruptcy will hurt a person's credit score, leading to higher interest rates and potential greater difficulty renting or securing a job. However, if managed wisely, consumers can emerge from bankruptcy and in a fairly short amount of time take steps to improve their credit through consistent and on-time bill payments. It's common for consumers to receive offers for secured credit cards soon after the bankruptcy process. With a little luck, credit scores can rapidly improve after few months or years, giving consumers access to standard credit and even home mortgage loans.

Working and Filing for Bankruptcy at the Same Time?

A third and equally important myth is that only unemployed individuals can file for bankruptcy. In fact, an entire chapter of the Bankruptcy Code provides a bankruptcy option for workers who have steady income but still cannot pay off their debts. Moreover, employers cannot fire workers solely for reasons having to do with employees' personal debt situation.

Bankruptcy courts exist to provide Americans overwhelmed by debt with a fresh start. In addition, debt counseling and mediation can help resolve financial distress. Contact an experienced bankruptcy attorney to discuss your options.