Dispelling Bankruptcy Myths
The truth about bankruptcy is that it can be an extremely beneficial resource when an individual or couple is financially struggling.
Contrary to popular belief, bankruptcy is a perfect opportunity for debtors to regain control of their finances, preserve essential assets, and work towards rebuilding their financial stability and future.
At Rushing Law Firm, we understand filing for bankruptcy can be a daunting process. If you are considering filing for bankruptcy, it's important to understand certain myths that tend to cloud people's judgment.
Myth 1: Bankruptcy is a sign of irresponsibility
Many times, people find themselves considering bankruptcy due to circumstances beyond their control. It could be the result of a sudden job loss, a medical emergency, or the fallout from a divorce. These are life events that can happen to anyone, and they can wreak havoc on your finances.
Bankruptcy isn't about shirking responsibilities; it's about seeking a lifeline when the unexpected strikes. It's a legal remedy for those who find themselves overwhelmed by debt and need a fresh start.
Myth 2: Bankruptcy will ruin your credit forever
Firstly, it's true that bankruptcy does impact your credit score. It's a significant financial event and it's only logical that it would reflect on your credit report. In fact, a bankruptcy filing can stay on your report for up to 10 years. But here's where the myth gets it wrong - it's not forever.
The moment you file for bankruptcy, you can start rebuilding your credit. One way is by securing a credit card. Yes, this might seem counterintuitive after bankruptcy, but it's a solid step towards credit recovery. With responsible use and timely payments, these cards can help you demonstrate a consistent pattern of reliable credit behavior.
Myth 3: Bankruptcy means you will lose everything
Under Chapter 13 bankruptcy, often referred to as the "wage earner's plan," you generally get to keep all your assets. Instead of selling them off, you propose a repayment plan to pay off your debts over three to five years, including any arrears on your home or car. This makes Chapter 13 a viable option if you're behind on mortgage or car payments.
Then there's Chapter 7 bankruptcy, the so-called "liquidation" plan. While it's true that under this plan the court may sell off non-exempt assets to satisfy creditors, it doesn't mean you'll be left with nothing. Many of your assets may be protected by bankruptcy exemption laws. In Arkansas, for instance, these exemptions often allow you to keep your home and car.
But what about Chapter 11? This is more often used for businesses, allowing business owners to continue operating while creating and honoring a repayment plan to creditors. It's similar to Chapter 13 but tailored for businesses.
Myth 4: Bankruptcy is an easy way to get rid of all your debts
While bankruptcy can indeed offer relief from overwhelming debt and provide a fresh start, it's important to understand that it doesn't discharge all types of debt. For instance, certain obligations like student loans, alimony, child support payments, and most taxes typically can't be discharged in bankruptcy.
Myth 5: Bankruptcy is only for individuals, not businesses
This myth is simply not true. Just like individuals, businesses can also file for bankruptcy. In fact, there are specific types of bankruptcy designed for businesses.
Chapter 11 bankruptcy, for instance, is specifically tailored to meet the needs of businesses. Under Chapter 11, business owners can continue running their operations while they create and honor a repayment plan for their creditors. This gives businesses the chance to restructure and regain their financial footing.
But what happens if the creditors don't approve the repayment plan? In that case, they can push for the business to enter Chapter 7 bankruptcy. Unlike Chapter 11, Chapter 7 involves liquidating the business assets to pay off debts. It's a more drastic step and one that often results in the closure of the business. That's why Chapter 7 is usually considered a last resort.
Then there's Chapter 13 bankruptcy. While it's typically used by individuals, self-employed individuals or sole proprietors can also file under this chapter. It allows them to create a repayment plan for their debts, much like Chapter 11, but on an individual scale.
Myth 6: Bankruptcy means you will never be able to borrow again
Filing for bankruptcy doesn't mean you'll never be able to borrow again. It's true that bankruptcy will impact your credit score and remain on your credit report for seven to ten years, but this doesn't mean you're barred from borrowing for life.
After filing for bankruptcy, your access to credit may be limited initially. You might find that the credit offers you receive come with higher interest rates or require more security, such as secured credit cards. But remember, this is temporary. As time goes on and you work to rebuild your financial health, your access to better credit options will improve.
Myth 7: Bankruptcy means you are a failure
Bankruptcy is a tool, a legal remedy available to U.S. citizens who find themselves in overwhelming debt. It's often the result of life events that are out of your control, such as severe illness, job loss, or divorce. These events can lead to financial distress that's difficult to overcome without help.
It's important to remember that bankruptcy isn't a reflection of your character or abilities. Instead, it's a reflection of the economic circumstances you're facing. Stagnant wages and an unpredictable economy play a significant role in many bankruptcy cases, rather than poor financial management.
Myth 8: Married couples will both have to file
There's a common assumption that if one spouse files for bankruptcy, the other must do so as well. However, this isn't always the case.
The decision for both spouses to file for bankruptcy depends largely on who is responsible for the debt. If you're married and considering bankruptcy, it's crucial to examine whose name the debts are in. If one spouse has accumulated a significant amount of debt solely in their name, it may be more beneficial for that individual to file for bankruptcy alone.
Why? If only one person is liable for the debt, filing jointly won't bring any additional benefits. In fact, it could unnecessarily harm the credit of the spouse who isn't responsible for the debt.
Myth 9: Recklessly spending right before bankruptcy means you won’t have to pay that money back
In the eyes of the law, racking up charges with the intention of dismissing them through bankruptcy is considered fraudulent. This is because it's seen as taking deliberate advantage of the system, which is designed to help those genuinely struggling with insurmountable debts, not those trying to game the system.
It's essential to understand that bankruptcy courts take this matter very seriously. If you're found guilty of such actions, your case may be dismissed, or worse, you could face criminal charges. Additionally, any debt incurred as a result of fraud will not be discharged, even after filing for bankruptcy. So, you'll still be liable for all the money you spent recklessly.
Legal Support Is Here for You
At Rushing Law Firm, we're here to help dispel the myths and guide you through the realities of bankruptcy. We're committed to helping our clients throughout El Dorado, Arkansas, and the surrounding areas regain control of their finances. Remember, knowledge is power. Understanding these myths can empower you to make informed decisions about your financial future.