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Bankruptcy: Fact vs. Fiction
Bankruptcy is synonymous with fear, confusion, and a lot of misinterpretation. Before you think you know all there is to know about bankruptcy, check out some of the common myths below.
1. Myth: A consumer can file for bankruptcy as often as they want.
Fact: Chapter 7 is often known as "straight bankruptcy." It involves the liquidation of all assets (except any that may be exempt in the consumer's state, such as a home, car, clothing, household appliances and furnishings, life insurance, pensions, work-related tools and household furnishings). The rest of the property can be sold by a court-appointed official or turned over to the consumer's creditors. A straightforward Chapter 7 proceeding usually takes four to six months. One can file for Chapter 7 only once every six years, and a notice of the filing will usually remain on the credit report for at least 10 years.
2. Myth: Filing for bankruptcy will give a consumer a chance to start over with their credit.
Fact: Depending on the type of bankruptcy a consumer files, certain debts may be dismissed using proceeds gathered from the liquidation of property, but a bankruptcy stays on a consumer's credit report for 7 to 10 years. A bankruptcy is the most negative notation on a consumer's credit report and can cost higher interest rates, impede the ability to rent an apartment, or even secure a new job.
3. Myth: A consumer can keep their car, house, boat, etc. without having to pay off the loans on them when they include them on their bankruptcy.
Fact: Bankruptcy is not a way to get out of paying for possessions one wants to keep. Non-exempt property will be liquidated in order to pay back the creditors who are included in the bankruptcy file. The list of non-exempt property varies from state to state, but typically includes a second home or vacation home and non-primary vehicles.
4. Myth: All debts can be included in a bankruptcy filing.
Fact: Certain types of debts and loans cannot be discharged under a bankruptcy filing. These debts and loans include child support payments, student loans, back taxes, and judgments.
5. Myth: A consumer filing for bankruptcy will not affect their spouse's credit.
Fact: Any joint debt shared with a spouse will appear on both consumers' credit report and, in turn, will be affected by a bankruptcy filing.
6. Myth: A consumer is subject to losing their job if they file for bankruptcy.
Fact: It is against the law for employers to terminate any employee based on the existing employee's decision to file for bankruptcy. However, current and prospective employers do have the right to check an employee or potential employee's credit report upon that individual's written permission.
7. Myth: A consumer will never be able to obtain new credit or purchase a home once they file bankruptcy.
Fact: A bankruptcy filing will stay on a consumer's credit report for 7 to 10 years, depending on the type of chapter bankruptcy that is filed. Filing for bankruptcy can make it difficult to obtain credit or a loan for many years, and cost them in high interest rates on the credit that is granted. However, creditors and lenders typically weigh a consumer's recent credit history more heavily than the past.
8. Myth: A consumer can elect whether or not to include a debt in a bankruptcy filing.
Fact: All debts, including those which a consumer intends to continue paying their monthly obligations on, must be listed on a bankruptcy filing.
9. Myth: Having late payments on a credit report is just as bad as having a bankruptcy filing.
Fact: Late payments, although they are negative notations, are not calculated as negatively as a bankruptcy filing. Late payments may cycle off of a credit report within 7 years, while a bankruptcy will remain on a credit report for 7 to 10 years.
10. Myth: A consumer's spouse can file for joint bankruptcy without the permission of the other spouse.
Fact: A spouse can file for bankruptcy without involving the assets of the other spouse, with the exception of any joint accounts. However, filing for joint bankruptcy requires the permission of both parties. This issue most commonly surfaces in divorce proceedings.
Deciding to declare bankruptcy is a huge decision for a consumer's credit, affecting it for 7 to 10 years and potentially costing money in higher interest rates. A consumer should consult a financial advisor or attorney for more information regarding bankruptcy.
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