Debt Relief: 5 Common Bankruptcy Misconceptions

With regard to bankruptcy as a tool for debt relief, there is a ton of misinformation floating around. Frankly, bankruptcy has gotten a bad rap and the process and its effects on future financial health are typically misunderstood.

If you are experiencing financial hardship, all recovery options should be considered and that includes bankruptcy. Here are 5 common misconceptions about the bankruptcy process to help clear the air.

5. Everyone will find out.

This is true...if you are a high profile individual like Donald Trump (or Octomom) or a large corporation like American Airlines. Most of us are not high profile like this and avoid this type of public scrutiny.

While bankruptcy is public record, only your credit report or records pulled directly from the bankruptcy court will indicate that you filed. It is highly unlikely that family, friends, neighbors or colleagues will find out if you file for bankruptcy.

Over 1 million people filed for bankruptcy last year. Quite possibly someone close to you filed and you do not even know.

4. If I file bankruptcy, I will lose my house, car, savings, etc.

This is not necessarily true. In fact, if you file chapter 13 bankruptcy, you are allowed to retain control of all your assets, regardless of their value. Even if you file chapter 7, in most cases, you can keep all of your assets and still wipe out all of your debt.

The bankruptcy law allows certain property exemptions that give debtors the ability to keep their assets while getting out of debt. This concept preserves the idea of the "fresh start." This concept would be meaningless if the court confiscated all of your assets and left you with nothing post-bankruptcy.

3. I'm not broke, I can't file for bankruptcy.

This is simply not true. You do not have to be destitute, poor or homeless to file for bankruptcy. In fact, the bankruptcy laws are designed to help honest, hard-working, middle class families get out of debt and get a fresh start. It is important that people take action to improve their financial state before they become destitute and bankruptcy can be a means to this end.

There is no minimum earnings requirement to qualify for bankruptcy. Bankruptcy, whether chapter 7, chapter 13 or chapter 11, is available to everyone regardless of income earned or the value of their assets.

2. Debt consolidation is a better option than bankruptcy.

Be careful with debt consolidation as an option to get out of debt. Typically, debt consolidation companies charge excessive fees that they collect before they will pay one penny to your creditors. Because of this, many people end up deeper in debt because of a failed debt consolidation attempt.

More importantly, debt consolidation does not offer the protections that bankruptcy does. Debt consolidation is voluntary and creditors do not have to accept the proposed repayment plan. This means that creditors can still pursue collections and take legal action against you after you have already paid thousands of dollars to a debt consolidation company.

In addition, many creditors refuse to accept payment plans and demand lump sum settlements.

1. Bankruptcy will ruin my credit.

This is probably the most common misconception about bankruptcy and it could not be further from the truth. In fact, in many cases, bankruptcy can actually improve credit.

High balances, delinquent accounts and late payments are all completely removed from your credit report allowing you to start from scratch and rebuild your credit. In addition, with no debt, you are less of a credit risk to potential lenders.

By wiping out all of your debt, bankruptcy will immediately improve your debt to income ratio, one of the main factors in determining your credit score.

While bankruptcy may be a last resort, it should still be considered as an option to get out of debt and rebuild for your financial future. It is important to educate yourself and always consult with an experienced bankruptcy lawyer before taking any action.

Frank P. Pipitone is a Queens bankruptcy lawyer and is the managing attorney at Pipitone Law located in Garden City, New York. He can be reached at 516.632.0337 or info@pipitonelaw.com. 

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