Common Bankruptcy Myths and Why You Shouldn’t Believe Them

If you’re considering filing for bankruptcy, you probably have many questions. There’s a lot of uncertainty surrounding bankruptcy, as society has taught us not to discuss it. This leaves misinformation and bankruptcy myths to circulate without adequate sources to ensure accurate information. While bankruptcy is often seen as negative, it can be a fresh start and allow you and your family to recover from crippling debt. Below, we address some common myths about bankruptcy and the truth behind them.

Myth 1: Only Irresponsible People File For Bankruptcy

This myth comes from the public perception that people who file for bankruptcy have lavish lifestyles and live beyond their means, spending money frivolously. In reality, however, the primary reasons individuals file for bankruptcy are job loss and medical expenses. Many people who file for bankruptcy are hard-working individuals who have fallen on difficult times, often through no fault of their own. Bankruptcy can be a way to help your family recover in the future.

Myth 2: My Credit Will Never Recover

This is one of the most common bankruptcy myths and makes many people who would benefit from bankruptcy hesitant to file. Your credit score is based on your history of being able to pay off debts. If you had great credit and a high credit score before bankruptcy, you’d see a significant drop in your score directly after filing—up to 200 points. Those with good credit will also take longer to recover their score after bankruptcy. If your credit score decreased due to missed payments before bankruptcy, you won’t see as much impact on your credit score. You can rebuild your credit as soon as 60 days after your bankruptcy is discharged. After this time, you may be able to obtain credit. However, you’ll likely have high interest rates and strict loan terms initially. As you rebuild your credit, you’ll be able to get better credit terms.

Myth 3: I’ll Lose Everything I Own

Many people are reluctant to file bankruptcy because they believe they will lose all their possessions and be forced to live on the streets. This is a cruel bankruptcy myth that is pure fiction. Regardless of whether you file for Chapter 7 or Chapter 13 bankruptcy, Florida law provides homestead exemptions so that you may be able to keep your home (or at least the equity you currently have in it). Bankruptcy exemptions allow you to keep possessions that won’t be part of the bankruptcy filing. Florida has ample bankruptcy exemptions, including (but not limited to):

  • $1,000 worth of personal property
  • Annuities
  • Disability benefits
  • Homestead properties
  • Unemployment benefits
  • Workers Compensation
  • $1,000 value for a motor vehicle

In Chapter 7 bankruptcy, you sell or “liquidate” assets to pay off creditors. However, because of Florida’s generous bankruptcy exemptions, some of your largest assets, such as your home or car, don’t have to be part of this liquidation process. When filing for Chapter 13 bankruptcy, you create a repayment plan to repay the debts you owe others. Often, homes and cars can be worked into the payment plan so that you can still keep these assets and file for bankruptcy. Your Florida bankruptcy attorney will work with you to determine what personal possessions would be exempt from bankruptcy.

Myth 4: I Won’t Be Able To Retire

Bankruptcy doesn’t need to derail your retirement. However, the closer you are to retirement age, the more impact filing for bankruptcy will have. Fortunately, many retirement plans and savings accounts are exempt from bankruptcy. These include ERISA tax-qualified plans like 401(k)s. IRAs, SEP IRAs, 403(b)s, and other retirement plans are exempt from filing bankruptcy. Pension plans and retirement benefits for various workers, such as first responders, are also exempt from bankruptcy. You can even keep your social security benefits.

Myth 5: My Friends and Neighbors Will Find Out

In most cases, no one will find out that you filed for bankruptcy unless you tell them. While bankruptcy is public record, not many people actively seek that information. Most newspapers don’t publish bankruptcy filings like they did years ago. In addition, the public record only states basic information like your name, address, and type of bankruptcy filing, not details about your debts or why you filed. While Chapter 7 bankruptcies remain on credit reports for up to 10 years, people would only find out if they ran a credit check on you—which we doubt any of your friends are doing behind your back.

Myth 6: I’ll Never Be Able to Own a House Or Car Again

Just because you filed for bankruptcy doesn’t mean you won’t be able to buy a home or get a credit card ever again. After being discharged from bankruptcy, you may be eligible for a loan or a credit card. Your creditworthiness will be assessed based on your ability to make timely payments in the future. Since bankruptcy wipes out most of your debts, many lenders may believe you can make payments on time. However, you might be offered higher interest rates on credit cards or loans in the first few years after filing for bankruptcy. Your interest rate and credit score should improve rapidly if you consistently make timely payments. Most individuals can qualify for a new home loan around two years after filing for Chapter 7 bankruptcy. During those two years, focus on improving your credit and saving for a down payment.

Bust Bankruptcy Myths with Badgley Law Group

Our team at Badgley Law Group will help determine whether filing for bankruptcy makes sense for your financial situation and help you through the process. Bankruptcy may be suitable if you have debt and see no reasonable way out. Bankruptcy may offer a clean slate to get you and your family back on track. Call our office at 407-781-0420 to schedule a consultation to discuss whether bankruptcy may be a good option for you and your family.

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