Bankruptcy Myths

by Bre, 1:17 PM reports that between October 1, 2005 and September 30, 2017 there were nearly 13 million consumer bankruptcy petitions filed. As the site notes, filing bankruptcy can provide a fresh financial start for those who are unable to pay their debts. While it will cause significant damage to your credit, resulting in a credit score that typically drops over 200 points, it can be the best option for discarding or paying off debts and/or liquidating assets for financial relief.

 Many people have fears about filing bankruptcy that are related to myths passed around for years that are simply not true – separating the truth from fiction can help you make the best decision for your financial situation.

Myth: All Bankruptcy Details Remain On your Credit Report for 10 Years, With No Exception

The reality is that only the public record for a Chapter 7 bankruptcy will stay on your credit report for a decade. Everything else related to the bankruptcy stays on your report for seven years, including any third-party collection debts, tax liens and judgments that are discharged through bankruptcy; Chapter 13 public record items, and trade lines stating, “account included in bankruptcy.”

Myth: You’ll Lose All Your Property

It’s not true that filing bankruptcy means you’ll lose all of your property. Exemptions can be used to protect it, meaning the asset will be protected from being sold to repay creditors. While exemptions vary depending on the state in which you file, in many you can choose between the federal bankruptcy exemptions or state bankruptcy exemptions, although you can’t mix exemptions from the two different systems. Many of the exemptions protect certain types of property such as your car, house or personal items. You may be able to protect the total value of an asset, but in some cases, you can only keep up to a certain dollar about of the protected asset.

Myth: It’s Better to Pay Off All Your Debts

While filing bankruptcy is a very serious decision, it doesn’t mean that you’d be better off paying all your debts. Oftentimes, it truly is the best option. While your credit score will take a big hit, that’s typically outweighed by the stress relief you’ll feel while providing you with a fresh start so that you can move forward to improving your financial situation. If your total debt is over half your annual income and you can’t find a way to pay it all off within the next five years, bankruptcy is probably your best choice, leading you on a path to becoming debt-free.

Myth: Bankruptcy Ruins Your Future

While bankruptcy will have a significant impact, limiting your access to credit and increasing interest rates on credit you are approved for over the next seven to 10 years, the reality is your credit score will likely rebound not long after filing. Typically, it jumps 80 points about six to eight months later, and it doesn’t take much longer to increase it even more by taking actions to restore it such as obtaining a secured credit card and making all your monthly payments on time.
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