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Some myths about bankruptcy debunked

On Behalf of | Oct 4, 2021 | Consumer Bankruptcy

Many consumers in Escondido, California, choose bankruptcy when they don’t see a way out of debt. Bankruptcy commonly occurs from unforeseen circumstances, such as divorce and medical issues. However, there are a few myths that may make a consumer hesitate to file.

Myth #1 – Debtors always lose everything

The only way debtor may lose assets is in Chapter 7, which uses the proceeds of the liquidation of assets to pay creditors. However, bankruptcy law recognizes debtors don’t deserve to lose all their assets and makes some of them exempt.

Even some nonexempt assets could be safe from creditors if they qualify under state or federal exemption amounts for equity. If a debtor has concerns about losing assets, Chapter 13 bankruptcy allows them to keep assets, but they need a regular source of income.

Myth #2 – Bankruptcy hurts credit for life

Bankruptcy does impact credit for several years, depending on the type of bankruptcy filed, but it eventually falls off. Chapter 7 bankruptcy stays on the credit report for 10 years and Chapter 13 stays on it for seven years.

Consumers can apply for loans or credit soon after bankruptcy, but the rates will commonly be higher. Financial experts suggest waiting four years to apply for a conventional loan and three years for a government-backed loan.

Myth #3 -Student loans can’t get discharged in bankruptcy

While it can be hard to get student loans discharged in bankruptcy, it isn’t impossible to get them all or partially discharged. If a debtor can prove paying the loan would cause undue hardship for some time, they could get it discharged.

The court may more likely dismiss loans if the student made a good faith effort to pay them. Otherwise, the debtor can try Chapter 13 and work them into the payment plan, which determines the amount.

One advantage of bankruptcy is the automatic stay, which temporarily halts debt collections. However, a debtor should carefully consider their options before filing.