Unfortunately, there are a whole lot of bankruptcy myths out there, many of which lead people to fear bankruptcy as the boogie man in the closet that will destroy their financial well-being. Many times, exactly the opposite is true! In the right circumstances, bankruptcy can provide the fresh financial start that so many consumers need to dig themselves out of a seemingly-endless financial hole. Below, I’ll tackle a few common myths and explain what is and isn’t true.
It’s OK to leave out some of your debt when you file for bankruptcy
This one is 100% completely false. The U.S. Bankruptcy Code requires that you reveal all assets and all debts when you file your bankruptcy petition. When you sign the bankruptcy paperwork, you sign it under oath–and it’s every bit as binding as testifying under oath in court. If you intentionally leave out any assets or debts, you have not only broken the law, you have also lied to your attorney (which may damage your relationship permanently since he or she may not feel capable of trusting you any longer).
You can’t get rid of any type of taxes in bankruptcy
This one isn’t quite as cut-and-dried. If you always filed your taxes on time–even if you couldn’t always afford to pay what you owed–any taxes that you owed longer than 3 years ago may be discharged through bankruptcy. Additionally, you can arrange to pay off other types of taxes through a Chapter 13 (reorganization) bankruptcy .
Bankruptcy will wipe off all of your debt.
This is another one that’s not always so clear. While most types of debts can be wiped out (which means that for some people it will “get rid of all debts”), certain kinds of debts, such as child support, alimony, student loans , criminal restitution, and some taxes , cannot be discharged in bankruptcy. Additionally, debtors are not allowed to run up large sums of debts just before the bankruptcy petition was filed, especially if they knew they had little likelihood of repaying the debt, and then eliminate them through bankruptcy. And while you can most likely keep your home and car during the bankruptcy process, you don’t get them for free: you still have to remain current on home and car loans if you want to keep the property.
Bankruptcy is only for poor people, or unscrupulous consumers who want to “game the system.”
This is another completely false statement. Bankruptcy is one of the rights granted to U.S. citizens under the Constitution, and it is a completely valid process for those who need it. While the vast majority of people truly want to pay off their debts on their own, the plain truth of the matter is that life happens. People get seriously ill, jobs are lost, and sometimes people find themselves in dire financial straits without the means to get themselves back on track. Additionally, plenty of famous and wealth (or once-wealthy) individuals have filed for bankruptcy through the ages. And the Bankruptcy Code has provisions to weed out most (if not all) of those dishonest people who do not truly need the protections granted by filing for bankruptcy.
You’ll never be able to get credit again!
This is another untruth. It’s true you may have a tough time getting unsecured credit right after the bankruptcy, as long as you pay your bills on time post-bankruptcy, your credit score will immediately start improving. You may have to pay a higher interest rate on credit purchases following a bankruptcy, but eventually you can rebuild a solid credit rating that will allow you to enjoy more reasonable credit rates once again. The most important steps are that you follow your bankruptcy attorney’s advice on reestablishing credit and pay those bills on time!