Most people have preconceived notions about bankruptcy, and the common bankruptcy stereotype doesn't usually make us sympathetic to people facing bankruptcy. When you think of someone who is filing for bankruptcy, you may think of the young, privileged adult who has racked up credit card debt through frivolous spending but is now forced to eat ramen noodles every night and ask family and friends to pay the bills.
The truth is that only a handful of bankruptcies actually look like this. If you're surprised, don't be. This is the picture that the media and entertainment industry has painted for us, but it couldn't be further from the truth. Bankruptcy in the United States is much different than you might expect it to be. Here are some of the most common bankruptcy myths:
People Who File for Bankruptcy Are Financially Irresponsible
It's easy to assume that filing for bankruptcy means a person can't resist the temptation of bankruptcy, but most people who file for bankruptcy do so for other reasons. There are always going to be people who abuse the system, but those people are very few and far between. The truth is that most people who file for bankruptcy are not financially irresponsible. They are good, honest and hardworking people. People who file for bankruptcy often spend their whole lives doing everything they can to stay out of debt, but something happens where they're no longer able to pay the bills. It may be losing their job, going through a divorce or suffering a serious illness. Long-term unemployment, high medical bills and the legal fees associated with divorce have driven many well-intentioned people into bankruptcy.
If You Spend a Ton of Money Before Filing for Bankruptcy, You Won't Have to Pay It Back
There are people who assume that they can rack up their credit cards before filing for bankruptcy and then have those debts discharged. It can be tempting to continue using your credit cards, especially if you're already having trouble paying your bills. But before you file for bankruptcy, your bankruptcy attorney will question your credit card usage, and after you file, the bankruptcy trustee will do the same. If you rack up a significant amount of debt within ninety (90) days prior to filing for bankruptcy, your creditors may try to object to your bankruptcy. They will likely try to argue that you used the money without the intention of paying it back. The bankruptcy court may consider this fraudulent, and if so, all debt that's incurred as a result of fraudulent conduct may not be discharged in bankruptcy.
Bankruptcy Discharges All of Your Past Debts
Many people who file for bankruptcy do so hoping they'll be able to get a fresh start afterward. In general, this is true, but it's important to understand that not all debts can be discharged in bankruptcy. Domestic support obligations, such as alimony or child support, student loan debt, and secured debt may not be discharged during bankruptcy. Debts that are not discharged in bankruptcy will need to be paid even after you receive your discharge.
Everyone Will Know You Filed for Bankruptcy
Unless you're a celebrity, public figure or a major corporation, there's a very small chance that people will find out that you're filing for bankruptcy. The only people who will know that you're filing for bankruptcy are your creditors and the people you tell. Although bankruptcy is a matter of public record, so many people have filed for bankruptcy that unless someone is specifically tracking down information about you, there's very little chance that anyone will even know that you filed.
Bankruptcy Ruins Your Credit Forever
One of the most common bankruptcy myths is that bankruptcy will ruin your credit score forever. This couldn't be further from the truth. People who file for bankruptcy are often surprised at how quickly they begin to receive credit card offers in the mail again. This isn't to say you should apply for every credit card offer you receive. However, offers for secured credit cards with a low limit can be worth looking at and can help you rebuild your credit. At some point, you'll choose to get a regular credit card again. When you do, don't spend more than you can afford and always make payments on time.
It is true that bankruptcy can stay listed on your credit report for up to ten years, but it will not prevent you from getting a really good credit score sometime in the not too distant future. Additionally, it will not prevent you from getting a good interest rate on a car or house. After you receive your discharge, you'll be surprised at how quickly your credit score can recover.
Filing for bankruptcy isn't the end of the world, and the process of filing for bankruptcy is often much different than you would expect it to be.