There is arguably no scarier word in the financial lexicon — heck, maybe the entire vocabulary — than “bankruptcy.” And there is some truth in this fear.
Yes, filing for bankruptcy is a major, life-changing step. To suggest otherwise would be irresponsible. Nobody should move ahead with a bankruptcy filing — or advise anyone else to head down that road — without conducting research. Unfortunately, this can be easier said than done!
Why? Well, because as you surely know from researching other important topics — such as those related to health and wellness — the web is loaded with misinformation. Some of this is due to well-intentioned, yet dangerously misinformed people. And some of it is due to folks who have a vested self-interest in deceiving and misleading. Unfortunately, both types of “contributors” gravitate towards websites, forums, comment boards and chatrooms related to bankruptcy.
Considering this obstacle, your key challenge is to separate bankruptcy facts from fiction. To help you achieve this critical goal, I’ll lean on the experience and knowledge of bankruptcy attorney Charles Huber, the principal and founder of The Law Offices of Charles Huber, to bust 3 persistent bankruptcy myths that could wreck your financial life:
Myth: Creditors are a reliable source of information regarding bankruptcy law.
Fact: The last people you should listen to — or frankly trust — are creditors. Many of them will say anything and everything to make you so fearful, that you’ll pay simply to stop the harassing emails, phone calls and letters. What you need to know here is that creditors, ironically, do not want you to file for bankruptcy. The moment you do, their collections actions and any wage garnishment proceedings must stop, and they must work directly (and only) with a court-appointed bankruptcy trustee to eventually get paid.
Myth: Filing for bankruptcy will destroy your credit score.
Fact: Obviously, filing for bankruptcy will reduce your credit score. The amount of points you lose will depend on what your score is now. The higher it is, the more it will fall. However, the belief that you’ll spend the rest of your life in bad credit country is simply false. If you prudently pay your bills on time and strategically apply for secured credit cards, then within a few months your credit score will start to rise and you’ll be eligible for conventional credit cards and loans. Within a couple of years (or maybe even sooner) you’ll be eligible for a mortgage and your score could be nicely in the 700s.
Myth: You can count on filing for chapter 7 (“liquidation”) bankruptcy, which will wipe out most of your debts.
Fact: Yes, chapter 7 bankruptcy will wipe out most of your debts (there are some exceptions, like restitution orders, alimony, child support, student loans, etc.). However, in order to qualify for chapter 7, your monthly disposable income must fall below the limit imposed by your state. Each state has its own threshold. If your disposable income it too high to qualify, then you can still file for chapter 13 bankruptcy, which is a structured debt repayment plan (typically facilitated by a bankruptcy trustee).
The Bottom Line
Yes, bankruptcy is serious — and yes (part two) it can be scary. But even scarier are the legions of bankruptcy myths out there that can either prevent you from filing when it’s in your best interest to do so, or just as costly, convince you to file when other alternatives make more sense. My best advice if for you to consult with an experienced bankruptcy attorney, who will help you get the facts you need to make an informed, smart and above all safe decision.
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