If you’re unable to pay off your debts, remember: you have options. Bankruptcy is one of them. Filing for bankruptcy can help to discharge your debts, or give you a workable plan to repay what you owe without losing essential assets like your home or vehicle.
While most people have heard of bankruptcy, there are still many uncertainties and misconceptions surrounding it. Read on for some common bankruptcy myths—and find out what’s really true.
Only Irresponsible People File for Bankruptcy
In reality, the circumstances leading to bankruptcy can happen to nearly anyone. Consumer debt in the USA topped $14 trillion in 2020, with more than a third of Americans saying they’ve experienced a worsening household financial situation since the pandemic. Add rising inflation and interest rates of top of that, and it’s no surprise that many people are finding themselves unable to keep up with debt. In some cases, bankruptcy may be the best option.
Filing for Bankruptcy ‘Resets’ Your Finances
Unfortunately, filing for bankruptcy doesn’t leave you with a clean slate. The declaration of bankruptcy remains on your credit record for up to 10 years, making this information visible to lenders, insurers and employers. You may find it more difficult to get a credit card, personal loan or mortgage, and will likely see higher interest rates on financial products. At the same time, erasing your debts via bankruptcy will boost your score: so depending on your individual situation, effects may balance out.
There’s Only One Kind of Bankruptcy
Bankruptcy isn’t a one-size-fits-all scenario. For individuals, the most common type of bankruptcy filing is Chapter 13, which prevents debt collectors from possessing your assets as long as you adhere to a court-mandated repayment plan. A Chapter 7 filing doesn’t come with a repayment plan, but enables a court-appointed trustee to liquidate certain assets, which may include a second car, stocks, or inherited items of value. Chapter 11 bankruptcies are usually reserved for businesses.
Filing for Bankruptcy is Fast
The term “filing” is something of a misnomer. When it comes to bankruptcy, you can’t just sign a piece of paper and be done! Any individuals must complete a pre-bankruptcy credit counselling course and debtor education program before they can file for bankruptcy. A list of approved credit counseling organizations can be accessed online through the U.S. Trustee Program. Once your bankruptcy filing is underway, prepare to hand over past tax returns and proof of income documents.
All Debts Can Be Eliminated Via Bankruptcy
Filing for bankruptcy can’t discharge certain types of debt, including: child support and alimony, debts for certain types of property damage or malicious injury to another person, and certain unpaid taxes. Student loans can also be tricky to eliminate through bankruptcy, unless the debtor can demonstrate severe financial hardship. If student loans are your primary reason for applying for bankruptcy, schedule a meeting with your lender as soon as possible—you may have more luck working out a repayment plan directly, rather than filing for bankruptcy.
Bankruptcy is Your Only Option
Bankruptcy is a powerful tool, but it’s not your only option. If you’re struggling to stay on top of debt, the first step is to contact your creditors. Many lenders are willing to negotiate or help you come up with a revised payment plan that better fits your current financial circumstances. Similarly, the IRS will sometimes offer a reduced tax bill or payment timeline if you can demonstrate financial hardship. Students loan offices and medical providers are also accustomed to debt negotiation, and should be able to at least discuss an alternate payment agreement. As always—it can’t hurt to ask!
HUECU members also have free access to certified financial counseling through GreenPath Financial Wellness. GreenPath's advisors can help you get back on track with your finances and take better control of any debt.