Filing for bankruptcy isn’t a pleasant experience for anyone, but it’s also not the end of the world. The majority of people who face overwhelming debt get into financial trouble through no fault of their own, and massive medical bills are a common reason.
Creditors and other so-called financial experts warn filing Chapter 7 or Chapter 13 can cause extra damage to a person’s credit. However, credit scores will likely plunge just as quickly or faster for those who can’t pay their bills and face foreclosure and repossession or are hounded by collection agencies.
Separate the myths from the facts
In many cases, filing for bankruptcy can be a quicker route to restoring credit while adding other protections for recovery. Here are five common myths:
Myth #1: Bankruptcy means you lose everything
- Fact: After filing Chapter 7, many people give up no possessions. Each state allows exemptions, which include necessities for everyday life. Under Chapter 13, you can keep everything and create a repayment plan.
Myth #2: Bankruptcy relieves all of your debt
- Fact: While many types of debts may be wiped clean, such as credit card balances, personal loans and past-due rent or house payments, not all debts are forgiven. You are still responsible for paying recent taxes, child and spousal support payments and student loans in most cases.
Myth #3: Paying off your debts is a better option
- Fact: Bankruptcy brings financial consequences. However, if your debts are more than half of your yearly income and you can’t pay them off in five years, bankruptcy is likely the best way to clear most of those debts and restore your credit.
Myth #4: Only irresponsible people file for bankruptcy
- Fact: Medical debt is the No. 1 reason people seek bankruptcy protection as deductibles have grown seven times faster than wages in the last decade. Two-thirds of all bankruptcies cite medical debt as the primary reason. Some people resist bankruptcy, even though their money problems aren’t their fault.
Myth #5: Bankruptcy ruins your future
- Fact: There are consequences as bankruptcy remains on a credit report for seven to 10 years. Limited access to credit and paying higher interest rates can also result. However, a study by the Federal Reserve Bank shows credit scores rebound faster for those who file Chapter 7.
How to determine the next step
Most of us strive to be responsible for our own obligations, and it can be challenging to consider an alternative approach to dealing with overwhelming debt. However, in many cases, filing for bankruptcy is the best option. An experienced bankruptcy attorney can help you determine the best route to restoring your financial freedom.