5 Common Misconceptions About Bankruptcy

by Guest Contributor · 12 comments

While many individuals seek to save money where possible, budget effectively and build a significant emergency fund, others are not so fortunate in their financial circumstances. Whether as a result of the significant rises in unemployment or the poor state of the property market, some individuals are experiencing considerable financial difficulty.

Debt has an inherent aspect of stigma attached to it so it is understandable many do not want to seek help especially if they feel bankruptcy is the only solution suitable. So what are the biggest misconceptions about the most stigmatized area of personal finances? Let’s explore it today since bankruptcy is such a seldom talked about topic.

1. Bankruptcy Will Result in Losing Your Home

Whether filing for Chapter 7 or Chapter 13 bankruptcy, there is little likelihood of a property being sold to recoup debts owed to an individual’s creditors. In a typical agreement, providing the house repayments are maintained and met on time, a property is not seized in order to cover your debts written off by bankruptcy. However, this can be enforced through an affirmation of the debt with your creditor.

2. You Will Be Fired for Filing for Bankruptcy

Not only is it unethical for an individual’s boss to fire their employee as a consequence of filing for bankruptcy, an individual’s job is also protected by federal legislation. While potential employers are permitted to look at your credit file, which will document any insolvency, they cannot discriminate against an individual on these financial grounds.

3. Bankruptcy will Clear All of Your Debts

While insolvency will eliminate the majority of debts that an individual may owe, there are debts that are exempt from Chapter 7 or Chapter 13 bankruptcies. Amongst these, the most common debts that an individual will still be eligible to repay are federal and specific state taxes, student loans and any debts accrued as a result of cases of fraud. There are particular caveats to instances of student loans and, as such, it is always best to consult a professional, independent company.

4. Bankruptcy Will Prevent You Getting Further Credit

This is not necessarily the case, but many individuals believe this to be true as a result of the reluctance of many major financial institutions to accept applications. Whilst there are many factors involved in a company’s decision to provide financial products to an individual having been declared bankrupt, such as time elapsed and their current credit score, the most crucial thing to remember is to be resilient. Quite often, persistence will pay off.

5. Bankruptcy Will Isolate You

Filing for bankruptcy can prove to be a cathartic process for many individuals following the concern over money and likely creditor harassment experienced in instances of serious debt. Once insolvency is decided upon as a course of action, an individual is supported in their application by professional debt advisors. These people will not only help to resolve the situation of debt but also aid in altering attitudes towards money so as to ensure a healthy relationship with finance in the future.

This guest post was written by David Brown on behalf of debt advice website, IVA – a financial website offering information, tools and guides on bankruptcy and other debt solutions.

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{ read the comments below or add one }

  • I agree with this article, most of the people are afraid when talking about bankruptcy. But yet they don’t know the positive side of bankruptcy for their lives.

  • Lesa Kempa says:

    Thanks for a really interesting read, learn quite a few tips here, trying hard to improve my credit , i did a consumer proposal 7 years ago and just now i am starting to rebuild my credit slowly but surely and trying to avoid that credit card trap.

  • LAN says:

    I can’t count the number of times I’ve been asked this when applying for a promotion. Cant see myself wanting to plop “yes” down on this one.

  • IVA.net says:

    Regrettably, it would have been impossible to have written an article that was specific to each individual US state’s legislation.

    The most important thing I wanted to tackle by writing this article was the stigma people attach to bankruptcy without much, if any, real knowledge of the process. From my experience, this stigma doesn’t appear to be as prevalent with alternative debt solutions.

    Would your perception of a fellow individual going through a debt management process, for instance, be different from knowing they were filing for bankruptcy? How about your perception of a friend?

    Though I am in complete agreement with the importance of considering all options, rather than simply advocating bankruptcy as a one-fit solution.

    (For further reading on point two, I found this Wikipedia page useful: http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act)

  • Thirtysomething Finance says:

    As to #2, the Bankruptcy Code prohibits discriminating against somebody because they’ve filed for bankruptcy.

    Certain states, like Florida, are known for their homestead exemptions, whereby people can exempt certain property from their bankruptcy estate.

    Personal bankruptcy should be your last resort.

  • Wojciech Kulicki says:

    I’m not certain, but I’m pretty sure that in certain states (like Florida), your primary home property and retirement savings are protected from certain events, like lawsuits.

    It’s possible that bankruptcy might fall under the same protection.

  • CreditShout says:

    @Rick agreed, #3 is definitely the biggest misconception. I didn’t know people actually thought you could be fired for filing for bankruptcy though, wouldn’t that be kinda counter productive?

  • Rick Vaughn says:

    Nice post Money.

    I think #3 is by far the biggest misconception.

    Also, people think they have leverage when they say they “will file bankruptcy” when trying to work with the bank on settlements. In the end your only hurting yourself.

  • I find it odd that in bankruptcy you would likely get stuck with your tax liability but then the IRS provides offers in compromise.

    As for #4, I had a family member claim bankruptcy several years ago. She said she had never seen so many offers for credit cards as she did once the bankruptcy was final. I wonder if this would still be true in todays banking crisis?

  • Jake @ DC says:

    Many people probably stay away from bankruptcy longer than they should because they know that they won’t be able to live the lifestyle they’ve been living any longer.

    Some may worry that this will isolate them from their friends who can continue to live that lifestyle.

    Not that this should really be the reason to stay out of bankruptcy.

  • Dee says:

    #2 doesn’t seem true.

    California, for instance, is an at-will employment state so you can be fired at any time, for almost any reason. Or no reason at all.

    If employers couldn’t use your credit check as a reason to disqualify you for employment, I’m not sure why they would even check.

  • John DeFlumeri Jr says:

    Still, think carefully and get several opinions before deciding to go bankrupt.

    John DeFlumeri Jr

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