For most people, the word “bankruptcy” is the scariest term in the financial vocabulary; except perhaps for “Great Recession” or “IRS audit.”
Granted, filing for personal bankruptcy is a dramatic step that has significant, far-reaching consequences. It’s not something anyone feels great about. There are no bankruptcy parties, or “congratulations on filing for bankruptcy!” cards (not even the cheesy or sarcastic e-card variety).
However, with this being said, there are some enduring myths about personal bankruptcy that prevent some people who should head down that road, from doing so and eventually restoring their financial health. Here are five costly personal bankruptcy myths that you or someone you care about should steer clear of…
Myth #1: If you file for bankruptcy, you’ll lose your home and car.
Truth: Provided that you’re up to date on your mortgage and live in a state that allows you to exempt the equity in your home, then you’ll be able to keep your home after filing for bankruptcy. The same rule applies to your car.
Myth #2: A bankruptcy filing will completely and permanently destroy your credit score.
Truth: Creditors are especially fond of perpetuating this personal bankruptcy myth, because they know that it’s a major concern for people who owe money — i.e. the belief that they’ll never be able to get a credit card again, open a bank account, get a job, rent a home, or basically do anything that requires a credit score that isn’t the equivalent of a 5-alarm tire fire.
While it’s definitely true that your credit score will take a significant hit upon a bankruptcy filing — there’s no way to sugar coat that unfortunate reality — be assured that you can rebuild your credit score rather quickly. For example, within months of filing you can obtain a secured credit card, and provided that you only use about 20 percent of the available credit and pay the full balance each month, then within about a year you should be able to apply for an unsecured credit card and car loan (although the interest rate is going to be pretty high).
Within a couple of years of prudent financial behavior, you’ll qualify for a mortgage and you’ll be back in the credit game. And while it may seem like forever right now, keep in mind that the bankruptcy filing will be wiped from your credit score 10 years after the date of filing.
Myth #3: If you file for bankruptcy, everyone will find out — like that cashier at the grocery store who always gives you a nasty look.
Truth: Unless you’re a celebrity or other notable personality — like a politician, the reigning hot dog eating champ, or the guy who invented Unified Communications as a Service (UCaaS) — there’s very little chance that anyone outside of your bankruptcy attorney (if you choose to retain one), your creditors, and the court-appointed trustee will know or care that you filed for bankruptcy.
Frankly, so many people file for personal bankruptcy each year (both chapter 7 and chapter 13) that it’s just not a newsworthy item.
Myth #4: If you file for bankruptcy, your creditors will follow through on their threats to sue you.
Truth: This is 100 percent not the case. When you file for bankruptcy, all of your creditors will be forced to cease their collection activity, and they will be legally barred from contacting you directly for any reason.
If they need to escalate an issue, they must do so through the court-appointed trustee, who in turn will either get in touch with you or with your attorney. Also, note that any wage garnishment action will also cease upon a bankruptcy filing.
Myth #5: If you’re married, then you must file for bankruptcy as a couple.
Truth: The law permits you to file individually or jointly. Just keep in mind that if you file as an individual, then creditors will still go after your spouse for any joint debts.
However, if there are no joint debts (at least not any that are currently in arrears), then it may make sense for you to file as an individual since it will preserve your spouse’s credit rating.