6 Common Myths About Bankruptcy
For many people, bankruptcy can feel like a financial doomsday. But if you’ve found yourself in this position, you should know you’re far from alone. In fact, the Judiciary News for the U.S. Court system estimated that bankruptcy filings increased by 16.8% in 2023.
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Unfortunately, negative attitudes around filing for bankruptcy can make it seem like a personal failing. These attitudes are rooted in pervasive myths that bankruptcy experts would frankly like to dispel.
GOBankingRates spoke with several experts to get a clearer understanding of the common myths about this fraught topic.
Only Reckless Spenders Need To File for Bankruptcy
The stereotypes around people who must file for bankruptcy typically evoke images of reckless spendthrifts tearing through designer stores before crying their way to the court. According to Keith L. Rucinski, CPA, JD, Chapter 13 trustee affiliated with the National Association of Chapter 13 Trustees, that picture needs to be wiped clean.
“Most people who file bankruptcy are victims of unexpected job loss, medical bills not covered by insurance (or high dollar co-payment plans leaving large balances for this the patient to pay), or an attempt to start a business was not successful,” he said.
You’ll Lose Everything and Have To Start Over
If you reached a point where bankruptcy seems like a viable option, you might have an immediate fear that you’ll lose everything you have. However, Stephen Kates, CFP, principal financial analyst for Annuity.org, can put those fears at ease.
“Most physical assets are either exempt from bankruptcy or not valuable to a creditor. While state laws vary, property such as your home, vehicle, clothing, or personal items are normally exempt from liquidation,” he said. “Other items like electronics or furniture are not typically useful for paying off debts in the same way a bank account might be.”
You’ll Never Be Able To Access Credit Again
One of the biggest bankruptcy myths that Isaac Marcushamer, partner and co-founder, DGIM Law, has encountered is that bankruptcy will utterly obliterate your chances of accessing credit again.
“Most businesses and individuals who file for bankruptcy are generally able to quickly access credit after bankruptcy,” he said. “While bankruptcy is not fun and should only be considered when actually needed, it does not normally create permanent reputation damage.”
Marcushamer reminded us that many of the largest companies in the U.S. have been through bankruptcy or restructuring. “Bankruptcy, executed properly, can save a business and return it to health and prosperity,” he said.
If You File for Bankruptcy, You Won’t Lose Any Assets or Property
Though there are some items that you likely won’t lose in bankruptcy, Kates said that the court might rule that certain assets can be liquidated or used to pay back debts. For instance, luxury items with defined value that you’ve completely paid off might be claimed.
“While attorneys can attempt to shield assets, they may not be entirely successful,” he said. “Discuss all your assets with your representative ahead of time to determine the risk to your property and assets.”
You Can Handle Bankruptcy on Your Own
Just because bankruptcy is a more common process than you might think, that doesn’t make it a simple one. Even Rucinski, who is well-versed in bankruptcy procedures, admitted that “the bankruptcy process can be overwhelming.”
First, there’s the paperwork to disclose all income, assets and liabilities. Then, there’s the notice to all the creditors, meeting with a trustee, as well as possible court hearings before a bankruptcy judge. If creditors object to the bankruptcy, their objections must be addressed.
If this sounds like a lot to deal with, that’s because it is. “The key to a successful bankruptcy is to find a good bankruptcy attorney,” Rucinski said.
He added that meeting with good attorneys in advance is key to reviewing your bankruptcy options based on your finances and your goals for filing for bankruptcy, such as saving your home or getting your monthly debt payments to a manageable level.
“Good attorneys will listen and offer advice. Their advice may include things people do not want to hear,” he said. “That may include giving up an expensive car with high monthly payments in order to have funds to save the home.”
Bankruptcy Will Define You Forever
If you have to file for bankruptcy, you’ll be in the company of former U.S. presidents, CEOs of large companies, as well as some of the most talented, award-winning actors and actresses — many of whom rebounded into exciting new chapters of their lives. In fact, they often went on to their greatest achievements post-bankruptcy.
“The reason no one remembers their bankruptcy case is they didn’t let the bankruptcy define them. Most went on to achieve their success after filing bankruptcy,” said Rucinski. “No one should ever let their bankruptcy case define them.”
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This article originally appeared on GOBankingRates.com: 6 Common Myths About Bankruptcy
