Most Popular Bankruptcy Myths

Bankruptcy is shrouded in myth – one of the reasons it still carries a significant stigma. Bankruptcy myths arise mostly from the history we attach to bankruptcy, but also from the legal complexity and subtle variations in the process. It is simply impossible to know all the subtleties of bankruptcy law without studying it very carefully and for a long time. What makes it even more confusing when deciding whether to file bankuptcy is that bankruptcy law varies from state to state.

These factors have an major impact on how we view the process, how it affects our financial standing, what happens after bankruptcy, and how other people will view us if we file for bankruptcy. As we can see from a close study of bankruptcy in our modern society, many of the things we believe about bankruptcy are not remotely true.

Myth #1 – When you file for Chapter 7 bankruptcy all your debts are wiped out.

Unfortunately for the person filing for bankruptcy this is not true. Certain debts such as child support, alimony, government-issued or government-guaranteed student loans, and debts applied as the result of fraud will not be forgiven in a Chapter 7. Also when property loans or car loans are secured by assets such as your house or car, those loans will normally remain in place.

A Chapter 7 bankruptcy involves the bankruptcy trustee gathering up and selling the debtor’s assets – other than those which are exempt or are pledged to specific creditors, for example a mortgage or car loan. The bankruptcy trustee then uses the proceeds of those non-exempt assets to pay legitimate creditors. The net result is that the debts to those creditors are fully discharged.

Myth #2 – Everyone in town will know I’ve filed bankruptcy.

Yes it is true that anyone who wants to go to the trouble to discover who is currently filing or who has filed for bankruptcy in the past can probably get hold of that information fairly easily.

But the simple fact is that unless you are someone the media has a reason to feature or highlight, it is extremely unlikely that the news about your bankruptcy filing will reach anyone other than your creditors and perhaps a few close friends and family members.

While bankruptcy is a public legal proceeding, there is no one place where you can find acentral list of people who have recently filed for bankruptcy. The numbers are so high, the list changes so often, and the jurisdictions are so diverse that unless a publication or directory has a significant staff assigned exclusively to watching these figures they are simply not going to do it.

Myth #3 – When I file for bankruptcy everything I own will be sold.

This is probably one of the biggest concerns that people have about bankruptcy and the thing that convinces them not to file. They have vague visions of debtors prison in their heads and assume they will have to start from scratch – no house, no car, no furniture, no computer, ipod, camera, or even tools required to make a living.

If it was actually like this you can imagine that almost no one would file for bankruptcy. Actual bankruptcy laws are different from state to state. But every state has exemptions that protect certain kinds of assets from being seized by your creditors or even the courts. These include your house, your car, household goods and clothing and money in qualified retirement plans.

These are just three of the more widely held myths about bankruptcy. There are many others. If you are considering filing for bankruptcy you would do well to seek the advice of a bankruptcy attorney who specializes in bankruptcy cases. There is better way to get an adequate explanation of the laws in your state, and good, solid information about which course of action is best for you.

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