In California and other states, no one wants to find themselves in a position where they need to file for bankruptcy protection. However, separating the facts from the fiction can demystify the process and help people make informed decisions about how this option may provide much-needed financial relief.
Married couples both have to file
Many assume that when a married couple files for bankruptcy, the filing includes both partners. However, this is not always the case. If the debt obligation lies with only one spouse, it usually makes more sense for that person to file individually. However, if both spouses have their names on the debt, it is more beneficial for both to file. In this scenario, if only one spouse files, creditors can demand full payment from the other spouse on the account because they did not also file bankruptcy.
Bankruptcy destroys your credit
A critical and pervasive myth is that bankruptcy destroys your credit score. While a bankruptcy filing does impact your credit score for a certain amount of time, usually seven to 10 years, it does not permanently ruin your credit. Many individuals find credit card companies sending offers shortly after a bankruptcy discharge. The cards typically have lower credit limits and have secured options to help individuals rebuild their credit. Time and responsible financial habits can help your credit recover from bankruptcy.
Only the financially irresponsible file bankruptcy
A common bankruptcy myth is that only people who spend irresponsibly and manage their money poorly file for bankruptcy protection. In reality, most people file bankruptcy due to overwhelming medical debt due to severe illness, a job loss or divorce.
Conversely, another myth is that people can spend excessively, such as charging their credit cards right before filing for bankruptcy and having the debts forgiven. In reality, the courts consider this behavior fraud. Debts incurred through fraudulent activity are not dischargeable by the bankruptcy court.
Bankruptcy discharges all your debts
A prevalent myth is that bankruptcy can discharge all debt. Chapter 7 can discharge personal loans, medical bills, credit card debt, back rent and utilities and sometimes certain secured debts. However, it does not discharge child support debt or judgements resulting from driving while intoxicated. Most tax debt is non-dischargeable and it is difficult to discharge student loan debt in bankruptcy.
Additionally, some believe you can only file for bankruptcy one time. However, you can file more than once, although doing so may damage your credit for longer.
You lose (or keep) all your assets in bankruptcy
Other myths prevail, such as that filing bankruptcy causes an individual to lose everything they own. This myth is untrue, and the bankruptcy court allows individuals to keep certain assets, such as their home, car and personal belongings. The court also allows individuals to keep a certain amount of cash in bank or investment accounts.
Conversely, some believe that a skilled bankruptcy attorney can prevent them from losing any assets in a bankruptcy. This myth is not valid, and people who kept a boat, additional home or other assets may not have wholly owned them in the first place. In reality, individuals may need to relinquish certain assets while being able to keep others as part of the bankruptcy filing process.
Bankruptcy is a financial remedy available to every U.S. citizen for an important reason. Life can present financial challenges for even the most fiscally responsible, and filing for bankruptcy can offer relief and a fresh start.