Bankruptcy Myths

…and the Honest Truth


Photo Credit: David Castillo Dominici

A friend of a friend told your Aunt Edna’s first child who told your mom who told you that if you file for bankruptcy you will grow a beard, lose your job and have to donate your kidney. As silly and unbelievable as it may sound, there is a lot of misinformation regarding personal bankruptcy.

Let’s take a look at 9 common bankruptcy myths and the truth behind those myths.

1. Bankruptcy clears you of all debts

False. Some debt cannot be cleared up in bankruptcy. Debt such as school loans, child support and alimony, and certain taxes are deemed as non-dischargeable in a bankruptcy case. Bankruptcy CAN help you clear up medical bills, credit cards, and personal loans.

2. People who file bankruptcy are irresponsible with their money.

False. Most bankruptcy cases can be traced back to job loss, divorce, or illness/injury. Filing for bankruptcy does not determine whether or not the person filing is irresponsible. In fact, a study done by Harvard University found that the biggest cause of bankruptcy was due to serious illness. Sixty-two percent of personal bankruptcy cases fall into this category. Bankruptcy can be a means to protect your family and begin a fresh financial future.

3. Bankruptcy ruins your credit permanently.

False. Bankruptcy is a negative mark on your credit score and will most certainly bring your score down. However, with time and diligence you can recover from bankruptcy and bring your credit score back up. Make a budget, pay all your bills on time, and keep an eye on your credit score. Interestingly enough, and very ironic, one of the best ways to re-establish credit is to open a line of credit. You can start with a secure credit card with a low monthly limit and get in the habit of using it and paying it off in full each month. Exercise caution with this as it can lead to issues if it is abused or neglected. Understanding your limits is imperative if you choose to open a line of credit.

4.  If your spouse files for bankruptcy, it will not affect your credit score.

False. If there is one or more joint accounts, it will affect your spouse’s credit score. However, the Bankruptcy Code allows a spouse to file individually without the other spouse. The non-filing spouse’s credit should go unaffected. The main point here is it must be individual debt. It cannot be debt accrued as a joint effort.

5. If you file bankruptcy you will never be able to purchase a house

False. Filing for bankruptcy does not dictate future ownership of a house or car. If the time and diligence is taken to repair your credit score, you could be a homeowner one day. The key is to build up your credit score again.

6. There is a minimum amount of debt needed in order to file for bankruptcy.

False. There is no magic minimum debt number that qualifies you for bankruptcy. If neglected, even a small amount of debt can cause financial strain and could be cause for filing bankruptcy. The key point here is not to ignore your debt. Be proactive and seek help immediately if you are struggling.

7. You will never get credit again if you file for bankruptcy.

False. The truth is filing for bankruptcy could actually improve your credit score by improving your debt to income ratio and opening up new lines of credit. As mentioned before, the debtor could use this new credit wisely and turn their credit around much sooner than it takes for the bankruptcy to get off your record.

8. You will lose everything you own if you file for bankruptcy.

False. Not necessarily true. Depending on the type of bankruptcy filed, you could still keep your house, car and other items. Many associated bankruptcy myths include: you can only keep one car if you file, you have to give up all of your vehicles if you file, and you can only have one TV in your house if you file. These are simply not true.

9. There is hope after filing bankruptcy.

Truth. You can move past bankruptcy and into a healthy financial future. It takes time, but starting with small steps you can improve your credit score, own a home, and live the life that you want with financial freedom you deserve. While bankruptcy can be a scary and stressful time, it is very important that you seek out help from an individual experienced in bankruptcy.