When it comes to filing for bankruptcy, there are several common misconceptions about what bankruptcy is and what it does. In this post, we will address some of the most common misunderstandings.
1. Bankruptcy destroys credit forever. Filing for bankruptcy does not mean that a filer is doomed to live without credit forever. In fact, filing for bankruptcy is often the first step toward fixing one’s credit.
After filing for bankruptcy, one of the best things a filer can do is open a new line of credit, most likely a secured line, and be responsible about making payments on time. Taking this step will help show future creditors that the filer is ready to manage debt responsibly again.
2. Only “bad” people file bankruptcy. There is a perception in some circles that everyone filing for bankruptcy is irresponsible. While some filers do declare bankruptcy because of a failure to manage debt appropriately, many others end up filing for bankruptcy through no fault of their own due to job loss, divorce or medical bills. The bottom line is that filing for bankruptcy does not mean someone is irresponsible. In fact, one could look at it the opposite way; that someone who files is being responsible by taking care of his or her financial situation.
3. Bankruptcy will get rid of all debt. Most consumer debt can be included in bankruptcy proceedings. However, certain debts cannot — including child support, alimony, criminal restitution, and most student loan debts. When it comes to tax debt, it very much depends on the circumstances.
4. Bankruptcy is a one-time deal. Financial situations can creep up more than once in life. For example, someone could end up racking up credit card debt in their 20s, only to end up going through a bitter and expensive divorce in their 40s. Another example is illness. Unfortunately, illness and the corresponding high medical bills can happen more than once.
Regardless of what someone may have heard, know that while the new bankruptcy laws do make it harder to file for bankruptcy more than once, it is still possible.
5. Everything is lost in bankruptcy. This is simply not true. It is a common misconception that all property is liquidated in Chapter 7 and all creditors must be paid back in Chapter 13. A trusted attorney with experience handling all types of debt situations will help filers hold on to their property and create repayments plans that make the most sense.
The bottom line is that bankruptcy is a tool that is available to people who are struggling with debt. At Rothschild & Ausbrooks, PLLC, we are dedicated to helping Tennessee residents get a fresh start.