Myths and Misconceptions

There’s a lot to know when it comes to the ins and outs of bankruptcy. Most people view it as a way to eliminate your debts and get a fresh start, but it’s not as simple as that.  The process is complex and stressful, and there are a lot of common myths and misconceptions.  There are several Chapters under which you can file, and each Chapter can have a different outcome depending on your unique situation and your goals you are seeking to accomplish.  Also, not everyone is eligible for filing under each Chapter, and some are not eligible to file at all.  There are alternative debt modification options for those who are completely ineligible to file.


Almost all individuals and couples who file for bankruptcy file under either Chapter 7 or 13, which are by far the most common types of bankruptcies.  Chapter 7 gives you a more immediate fresh start by eliminating most or all of your debts.  Chapter 13 also allows you to eliminate most or all of your debts, under appropriate circumstances, and it has the added benefit of allowing you to permanently stop foreclosure of your home by paying back your missed payments over a three to five years repayment plan.  Chapter 13 also allows you to eliminate a second mortgage through the Lienstripping process.


Here are some of the most common myths and misconceptions:


1.  Filing for bankruptcy eliminates your rights and control over your assets and finances.  Actually, in most cases the opposite is true. Bankruptcy is a form or protection for you and your assets and finances. Under Federal law, by filing you are automatically given certain legal rights.  For example, you can immediately stop a home foreclosure that’s already in process by filing under Chapter 13.  Both Chapter 7 and 13 require creditors to stop contacting you as soon as you file.  Bankruptcy is a good option for people who are in danger of losing their assets because of debt, so it’s actually a way to regain control over your finances, property, and life.


2.  Filing for bankruptcy will permanently ruin my credit.  Bankruptcy will be on your credit record for seven to ten years, but not permanently. On the other hand, unpaid debts will lower your credit score, but the act of filing for relief will not. If you are considering filing a bankruptcy, chances are your credit score is not in very good shape, but the sooner you file, the sooner it will improve. Your credit score can begin to repair itself in as little as two years, and you may be able to receive a new mortgage loan from a bank under special conditions within the same time frame.  Although you will only be able to get a credit card with a very low limit, if at all, staying current with your payments will raise your credit limit with time.  


3.  Only lower-income or irresponsible people file bankruptcy.  One of the biggest reasons many people hesitate to file for relief is because of their egos.  People of all income levels from all walks of life choose to file and for various reasons.  Each person’s situation is different.  There are at least four bankrupt U.S. Presidents and many more bankrupt millionaires, billionaires, and famous celebrities.  In fact, people in higher income brackets frequently file because these people tend to have more assets and property to both lose and protect. And while being irresponsible with money and making reckless purchases can get you into big trouble with debt, it’s more common to be faced with bankruptcy after losing a high-paying job, or being laid off through no fault of your own.


4.  You can only file bankruptcy once.  Legally, you can file for bankruptcy multiple times within your lifetime. However, second or subsequent bankruptcies are far less common than first ones, because Federal law is designed to help you start with a clean slate and stay in control of your finances.  Having said that, it is certainly possible for a person who’s filed for bankruptcy to get back on their feet and be doing quite well, only to be faced with the sudden loss of a job, a medical condition, or other life circumstances that render them unable to pay their bills.


The type of bankruptcy that your lawyer will recommend for you to file will depend on your individual circumstances, including the amount of debt, assets, and income you have, and how important it is to you to protect your assets.  So it’s best to consult a San Diego bankruptcy attorney for advice on which type to file and how bankruptcy will affect you and more importantly how it will protect you and your family from creditors and debt collectors.