Monday, April 27, 2009

Myths About Bankruptcy


By Kaitlin Lanier
Bankruptcy has the reputation of being a big, scary process. There are many assumptions and embellishments when bankruptcy is discussed. However, the truth is not nearly as frightening as most believe. So if you need to file bankruptcy, wouldn?t you want to know the truth? Here are the most common misconceptions and the truth behind them:
  • Everyone will know I filed for bankruptcy. Unless you are a prominent person or you are filing with a big company, chances are high that the only people that will know about your bankruptcy filing are your creditors.
  • All debts are wiped out in Chapter 7 bankruptcy. Certain types of debt, like child support, alimony, and student loans cannot be wiped clean. Make sure to figure out exactly what your debts are before filing bankruptcy.
  • I'll lose everything I have. Bankruptcy laws do vary from state to state, but every state has exemptions that protect certain kinds of assets.
  • I'll never get credit again. The truth is actually the opposite. It won't be long until you are offered credit cards again, even though they will most likely be from subprime lenders that will charge very high interest rates.
  • If you are married, both spouses have to file for bankruptcy. Not necessarily. It is not uncommon to have one spouse in signficant debt while the other is not. However, they are encouraged to file together, otherwise the creditors will demand payment for the entire amount from the spouse that did not file.
  • It's really hard to file for bankruptcy. It is not. You can always ask an attorney for help or file by yourself once you do enough research.
  • Only deadbeats file for bankruptcy. Most people actually file bankruptcy after a life-altering event, such as divorce or illness. The debt has just piled on and they need help.
  • I don't want to include all my creditors in my filing. Well, that actually cannot happen. It's an all-or-nothing deal. However, if you want to pay certain creditors back, despite the fact that the debt is erased, you will still be able to do so.
  • Filing for bankruptcy will improve my credit rating because all of the debt will be erased. Actually, bankruptcy is the worst negative you can have on your credit rating. While other negatives may only be on your credit for a few years, bankruptcy can last for 10 years.
  • You can't get rid of back taxes through bankruptcy. Generally, this is true. However, there is such a thing called tax bankruptcy, where you have to file all your old returns and the taxes owed need to be at least three years old.
  • You can file for bankruptcy once. You can actually file for Chapter 7 bankruptcy once every eight years. For Chapter 13 reorganization, you can file more often than that, but cannot have more than one case open at a time. However, multiple bankruptcies are really bad and not good for your credit rating.
  • I can max out all my credit cards, file for bankruptcy, and never have to pay for the things I bought. This is called fraud and bankruptcy judges are on the look out for it. The trustee in your case will review all the purchases you made and be aware if you tried or did commit fraud.

Sources:
MSN Money Article
Bankruptcy Law Network Article

Bankrate.com Article

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