Clear A Debt: 12 Myths about Bankruptcy

Like most big, bad scary things, bankruptcyhas a reputation based on a few tidbits of truth and lotsof embellishment. And like most creepy crawlies, it's notnearly as frightening once you know the truth.With a mind toward declawing the monster, here are a dozenmisconceptions about bankruptcy:

1. Everyone will know I've filedfor bankruptcy.Unless you're a prominent personor a major corporation and the filing is picked up by themedia, the chances are very good that the only people whowill know about a filing are your creditors. While it's truethat bankruptcy is a public legal proceeding, the numbersof people filing are so massive, very few publications havethe space, the manpower or the inclination to run all of them.

2. All debts are wiped out inChapter 7 bankruptcy.You wish. Certaintypes of debts cannot be discharged, or erased. They includechild support and alimony, student loans and debts incurredas the result of fraud. It's also very unlikely that a judgewill discharge legal settlements you've been assessed, suchas money you've been ordered to pay to someone who sued you.

3. I'll lose everything I have.Thisis the misconception that keeps people who really should filefor bankruptcy from doing it, says Chris Viale, chief operatingofficer of Massachusetts-based Cambridge Credit CounsellingCorp.

"They think the government will selleverything they have and they'll have to start over in a cardboardbox," Viale says.While the bankruptcy laws vary from state to state, everystate has exemptions that protect certain kinds of assets,such as your house, your car (up to a certain value), moneyin qualified retirement plans, household goods and clothing.

"For most people, they'll pass througha bankruptcy case and keep everything they have," saysJohn Hargrave, a bankruptcy trustee in New Jersey. If youhave a mortgage or a car loan, you can keep those as longas you keep making the payments (like the rest of us).

4. I'll never get credit again.Quite the contrary. It won't belong before you're getting credit card offers again. They'lljust be from subprime lenders that will charge very high interestrates. "There are innumerable companies that will providecredit to you," says California bankruptcy attorney andtrustee Howard Ehrenberg. "I don't advise any of my clientsto run out and run up the bills again, but if someone doesneed an automobile, they can go and will be able to get credit.You don't have to go underground or something to get money."However, if you're planning to buy a houseor a car, you might want to do that before you file. Thoseloans will be tough to get and the higher interest rate onsuch a large purchase would make a significant impact on yourpayments. Also, if you have a credit card with a zero balanceon the day you file for bankruptcy, you don't have to listit as a creditor since you don't owe any money on it. Thatmeans, you might be able to keep that card even after thebankruptcy.

5. If you're married, both spouseshave to file for bankruptcy.Not necessarily. "It'snot uncommon for one spouse to have a significant amount ofdebt in their name only," Hargrave says. However, ifspouses have debts they want to discharge that they're bothliable for, they should file together. Otherwise, the creditorwill simply demand payment for the entire amount from thespouse who didn't file.

6. It's really hard to file forbankruptcy.It's really not. You don't even technicallyneed an attorney. However, it's not recommended to go throughthe procedure without one.

7. Only deadbeats file for bankruptcy.Most people file for bankruptcy after a life-changingexperience, such as a divorce, the loss of a job or a seriousillness. They've struggled to pay their bills for months andjust keep falling further behind.

8. I don't want to include certaincreditors in my filing because it's important to me to paythem back someday and if the debt is discharged, I can't everrepay them.Bless you for even thinking about sucha thing. You're no longer obligated to repay them, but youalways have that opportunity. If your conscience won't letyou sleep nights because you didn't pay your debts, there'snothing in the bankruptcy code that prevents you from doingthat once you're back on your feet. But bankruptcy is an all-or-nothingdeal, so you have to include all your creditors in the petition.

9. Filing for bankruptcy willimprove my credit rating because all those debts will be gone.That sounds like an ad for a bankruptcy lawyertrolling for clients. Filing for bankruptcy is the worst 'negative'you can have on your credit report. Unlike other negatives,which stay on your report for seven years, bankruptcy canbe there for 10 years.To repair your credit follow this link:
Bankruptcy Kit to repair your credit.

10. You can't get rid of backtaxes through bankruptcy. Generally speaking, thisis true. However, there issuch a thing as tax bankruptcy, says tax educator Eva Rosenberg,known on the Web as Tax Mama. To get a shot at it, you haveto file all your returns and the taxes owed need to be atleast three years old.

11. You can only file for bankruptcyonce.

The truth is, you can only file for Chapter7 bankruptcy once every six years, Hargrave says.For Chapter 13 reorganization, you can file more oftenthan that, but you can't have more than one case open at thesame time, he says.Of course, that doesn't make it a good idea."Multiple bankruptcies are really bad," Rosenbergsays. "Many people get into the habit of once they'vedone it, it becomes a way of life. This is not good for yourkarma." Or your credit rating.

12. I can max out all my creditcards, file for bankruptcy, and never pay for the things Ibought.That's called fraud and bankruptcyjudges can get really cranky about it. The trustee in yourcase will review all your purchases right before your filing.He knows what to look for.

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