Many people may suffer from misunderstandings about the impacts that filing bankruptcy will have on their assets, debts, credit and employment.
Bankruptcy is one of the more widely recognized and employed options for securing relief from debt. According to the U.S. Bankruptcy Court for the District of Columbia, 682 people and businesses filed bankruptcy in the District in 2015. However, many aspects of filing bankruptcy are also largely misunderstood, which may give some people false expectations about the process and deter others from filing. This makes it crucial for anyone struggling with debt to understand the following damaging myths about bankruptcy.
1. Full debt forgiveness
Many people who are considering filing bankruptcy believe that all debts are eligible for discharge under the U.S. Bankruptcy Code. However, this isn't the case. U.S. News reports that various forms of debt typically cannot be forgiven at the end of Chapter 7 or Chapter 13 bankruptcy case, including the following:
- Student loan debt
- Debt that is considered fraudulent
- Debt from child or spousal support payments
- Debt stemming from court-ordered restitution
The types of debt that are eligible for discharge vary depending on the chapter of bankruptcy that a consumer files. Per the U.S. Bankruptcy Code, more types of debt can be forgiven in a Chapter 13 bankruptcy case than in a Chapter 7 case.
2. Inevitable asset loss
The loss of personal property is often incorrectly seen as an unavoidable outcome of bankruptcy. Certain assets are exempt from liquidation in Chapter 7 bankruptcy, and consumers who file under this chapter can prevent the liquidation of secured assets by reaffirming their debt with a creditor. Once this is done, consumers may keep an asset as long as they continue making payments toward it. People who file Chapter 13 bankruptcy may similarly keep secured assets if they stay current with payments to creditors.
3. Challenges rebuilding credit
Many people think bankruptcy permanently harms a person's credit score and ability to secure credit. A bankruptcy filing appears on a credit report for several years, but this doesn't prevent a person's credit score from improving. U.S. News notes that some people may be eligible to receive secured credit cards soon after the bankruptcy debt discharge is complete. People who work on rebuilding credit after bankruptcy might even qualify for secured loans within a few years of the debt discharge.
4. Impact on employment
Another widespread misconception is that filing bankruptcy can provide grounds for termination of employment. Under the U.S. Bankruptcy Code, government units and private employers are prohibited from discriminating against an employee because he or she filed bankruptcy. Government entities are also forbidden from denying a person employment based on a bankruptcy filing.
Avoiding other misunderstandings
Given the complexity of the U.S. Bankruptcy Code as well as state laws, many people may suffer from further misconceptions about bankruptcy. Consequently, it's crucial for anyone who is seriously thinking of filing bankruptcy to consider consulting with an attorney. An attorney may be able to offer advice on assessing whether to file bankruptcy, selecting the appropriate chapter and understanding what to expect as the case progresses.