Most of us understand a few basic aspects of bankruptcy, but we often suffer from myths and misconceptions that are perpetuated by pop culture and the general public. You may be surprised to learn, for example, that bankruptcy doesn’t automatically eliminate all your debt, or that bankruptcy doesn’t ruin your credit forever.
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In this guide, we’ll take a look at some of the most common misconceptions – and present you with accurate information to supplant it.
Table of Contents
What Is Bankruptcy, Anyway?
Bankruptcy is the term for the legal process of relieving some or all debts held by an individual. It exists to prevent situations where people’s entire lives are ruined by debt. There are many different types of bankruptcy in the United States, so a vague definition must suffice here.
If you want to file for bankruptcy, the best course of action is to talk to a bankruptcy lawyer to discuss your options. Bankruptcy is a complex and poorly understood legal topic, but your bankruptcy lawyer can help you understand it – and advise you on how to move forward.
Misconceptions About Filing for Bankruptcy
These are some of the biggest misconceptions about filing for bankruptcy:
1. There’s only one type of bankruptcy. People sometimes imagine that bankruptcy is a single process, with a single, unchanging series of steps to follow. In reality, there are many different types of bankruptcy, with Chapter 7 and Chapter 11 bankruptcy being the most common for consumers. In some cases, bankruptcy discharges all your debt. In other cases, it simply reorganizes your debt, so you can pay it off more reasonably. Different options exist because every case is unique.
2. Bankruptcy discharges all your debts. It’s tempting to think that bankruptcy discharges all your debts, because that’s how it’s sometimes presented in pop culture. But there are some types of debt that cannot be discharged through bankruptcy, and depending on which type of bankruptcy you file for, it’s possible that none of your debts will be discharged. That may sound like a bad thing, but it could actually work in your favor.
3. Bankruptcy is only for financially irresponsible people. Many people believe that bankruptcy is exclusively for grossly irresponsible people, such as people who gamble their life savings away. But this simply isn’t the case. Death, severe illness, and job loss are the main reasons people file for bankruptcy.
4. Bankruptcy will ruin your credit forever. Bankruptcy does harm your credit score, and can impact your credit for several years after you initially file for it. However, filing for bankruptcy doesn’t mean you’ll never be able to take out a loan again – and it’s only a matter of time before it disappears from your credit report entirely.
5. You’ll lose your house and your car in bankruptcy. There are some cases in which filing for bankruptcy can cause you to lose your house, your car, or other important assets. However, this is exceedingly rare. In most jurisdictions and in most cases, consumers are entitled to keep the assets most important to their daily life.
6. You may have to liquidate your retirement accounts. Similarly, there are protections for retirement accounts in place. Depending on what you owe and what type of bankruptcy you were filing for, you may be required to liquidate a portion of your retirement accounts, but much of your retirement savings will be preserved.
7. Married couples will both need to file. If you’re married, you may believe that both you and your spouse will need to file. But this isn’t necessarily the case. If only one spouse has the debt, you may both benefit from that spouse filing independently.
8. Your career is going to suffer from bankruptcy. Employers are legally prohibited from discriminating against employees on the basis of bankruptcy filings. While bankruptcy is stressful and challenging, it should not have a direct impact on your career.
9. Bankruptcy gives you an opportunity for a spending spree. If you know you’re filing for bankruptcy, you might as well go on a spending spree; after all, you know your debt is about to be discharged, right? Unfortunately, excessive spending before filing for bankruptcy is considered a form of fraud and could land you in much deeper legal trouble. You cannot, and should not, spend recklessly before filing for bankruptcy.
10. Bankruptcy filings are often denied. In some ways, filing for bankruptcy is a request that you’re hoping will be granted. But what are the chances that this request is going to be granted? 50 percent? 60 percent? In reality, it’s extremely rare for bankruptcy filings to be denied.
11. You can easily file for bankruptcy on your own. Modern generative AI tools may equip you with more knowledge and resources about bankruptcy and other legal topics, but they’re not currently at the point where they allow people to effectively file for bankruptcy by themselves. No matter how smart you are or how much you think you know about bankruptcy, it’s almost always better to file with the help of an experienced lawyer.
Now that you have a better understanding of bankruptcy, you may feel more comfortable pursuing it. If you’re struggling to get rid of some or all of your debts, the next step is talking to a bankruptcy lawyer, who can advise you on how to approach your unique situation.
