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Common bankruptcy myths
American Middle Class

9 Common Bankruptcy Myths

The estimated reading time for this post is 218 seconds

Common bankruptcy myths are everywhere, even though American consumers have been filing chapter 13 and chapter 7 bankruptcies since modern bankruptcy laws enacted back in the 1930s. 

What is Bankruptcy

Bankruptcy is a federal court proceeding designed to help consumers and businesses reorganize their debt.  Most consumers either file chapter 13 or chapter 7 bankruptcy.Chapter 13 personal bankruptcy is more accessible to file than chapter 7 because it does not discharge your debt. 

Chapter 13 Bankruptcy 

Chapter 13 personal bankruptcy is more accessible to file than chapter 7 because it does not discharge your debt.  You have to submit a three-to-five-year repayment plan to repay all or part of your debt.  Your creditors can disagree with the repayment plan you submitted to the courts.  However, the bankruptcy judge has the final word, not your creditors

Chapter 7 Bankruptcy 

Businesses and consumers who are down on their luck can file for chapter 7 or liquidation bankruptcy.  If you are not earning enough money to make minimum payments on all your debts, you will most likely approve to file chapter 7 bankruptcy. 

Common Bankruptcy Myths

Many Americans are struggling financially.  Both chapter 7 & 13 bankruptcies can provide them with a fresh-start they desperately deserve; however, long-dated myths about bankruptcy stop them from filing.  Here are the 9 common bankruptcy myths:

I’ll Lose Everything I Have

Your homestead or primary home, qualified retirement accounts, including defined-benefit and defined-contribution plans, public benefits, and tools for the trade professionals, are all exempt properties. 

All Debts are Wiped out in Chapter 7 Bankruptcy

Some people believe that filing for bankruptcy will interfere with child support. Student loans, alimony, child support, debt related to fraud, and three year back taxes are all debts that cannot be discharged through bankruptcy

Only deadbeats file for bankruptcy

Some people believe filing for bankruptcy is not an honorable thing to do.  They think that they must pay back every borrowed money regardless of their current financial situation. 

The statement, as mentioned earlier, is half-true. You must pay back your lenders, but your financial situation can be different five years from now.

In 2005, Congress passed, and George W Bush signed new bankruptcies, which limit how often someone can discharge their debts.  So, if you met the stress test, you should not feel ashamed for wanting a fresh start.

My Partner Has to File with Me

Your partner does not have to file bankruptcy with you.  However, you are better off filing together, especially if you live in a community property state.  Filing alone will allow creditors to go after your partner once your bankruptcy is discharged. For properties that you and your spouse own jointly, your bankruptcy administrator might have to sell them.

You Can’t Get Rid of Back Taxes Through Bankruptcy

You can discharge IRS debt through bankruptcy. However, IRS has specific criteria that you have to meet before you can get rid of back taxes through bankruptcy. Here’s a list of debt that you can discharge through Chapter 7 personal bankruptcy:

  • Student loans
  • Alimony
  • Child support
  • Debt related to fraud
  • Three years back taxes

You Can Only File for Bankruptcy Once

In 2005, Congress passed, and George W Bush signed new bankruptcies, which limit how often someone can discharge their debt.  You can file for bankruptcy as many times as you want, but wiping away debts is something you can do every eight years. In the meantime, you can file a chapter 13 bankruptcy.

I Can Max Out All My Credit Cards, then File for Bankruptcy

You can’t run up all your credit cards, then file for bankruptcy. Your creditors would most likely file adversarial proceedings and claim that you obtain the credit card loans by fraudulent means. Bankruptcy judges often agree with the creditors and deem the debt nondischargeable.

Everyone Will Know

Bankruptcy proceedings are public information, a quick search from your county court of clerks might reveal your bankruptcy filing.  The tradeline stays on your credit reports for up to 7 years. So, your prospective creditor would know that you filed for bankruptcy.  

Bankruptcy, both chapters 7 and 13, allow you to streamline your finances and start over.  If you are experiencing severe financial difficulties, worrying about what others think should be your least concern.  

Bankruptcy Discharges All Debt.

Bankruptcy does not discharge all debts.  Here’s a list of debt that you can discharge through Chapter 7 personal bankruptcy:

  • Student loans
  • Alimony
  • Child support
  • Debt related to fraud
  • Three years back taxes

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