5 Bankruptcy Myths


Filing bankruptcy can be a complicated and confusing process for many people. Because of the mystery surrounding what all is involved, many misunderstandings or myths exist. We hope to help clear up some of these myths and remove a bit of the mystery surrounding both the Chapter 7 and Chapter 13 bankruptcy process.

1. The Filer Loses Everything.

One of the biggest myths surrounding bankruptcy is the belief that the person who files for bankruptcy will lose all of his or her assets upon filing for bankruptcy, including the person’s home, car or any other valuable assets.

This belief is far from the truth. In fact, most filers will be able to utilize the state’s laws to properly protect their personal property.

If the filer is pursuing a Chapter 13 reorganization bankruptcy, he or she will likely keep all of their assets through the proposed repayment plan.

If the person is filing a Chapter 7 bankruptcy, the vast majority of these cases are considered “no-asset cases,” which means the debtor keeps all of their property.

The state exemption laws cover a person’s home, car, or other items that are needed for day-to-day life. Any assets that are not normally covered by exemption laws are not property that creditors want so they often will not be at risk. A bankruptcy attorney will be able to explain these exemptions and what is and is not covered.

2. All Debts Will Be Liquidated.

Another myth that is commonly believed is that a filer will walk away from a bankruptcy with absolutely no debts remaining. While both forms of bankruptcy do provide relief from most forms of debts, not all can be discharged so easily.

One excellent example of a debt that is hard to discharge is student loan debts. These loans can be discharged only in rare circumstances if the debtor can successfully establish a legal hardship under federal bankruptcy law. It is not an easy burden to meet, which means many filers are not able to get relief from student loan debt.

Other debts that are not discharged and stay with the filer, include child or family support judgments, as well as certain tax debt obligations.

3. It is Better to Pay Off Debts Over Bankruptcy.

Many individuals also mistakenly believe that it is better to continue paying debts down instead of pursuing a bankruptcy filing. Making the decision to file for bankruptcy is often seen as a last resort or an admission of failure. However, it is often also the inevitable result.

The debt that someone may be continuing to pay down may be debt that could be liquidated through bankruptcy. This means that the debtor is essentially throwing his or her money away in paying a debt that would eventually be liquidated.

A good rule of thumb is if the person’s debts are more than 50 percent of his or her annual income, bankruptcy is often the best choice for that person. A bankruptcy attorney can help advise you on these options.

4. Filing for Bankruptcy Means Failure

One of the main reasons why individuals facing tough financial situations choose to pay off the debt rather than file for bankruptcy is the belief that choosing to file for bankruptcy means he or she failed personally. That belief could not be any less correct, however.

Bankruptcies result from many different causes, including unemployment, illness, divorce, tough financial circumstances, mounting medical bills and poor financial decisions. Bankruptcy allows that person to get out of a difficult situation and start fresh, which can be the best decision that person has ever made.

5. Bankruptcy Ruins the Filer’s Finances Forever.

One last misconception that exists involves the idea that filing for bankruptcy will forever taint the filer’s finances.

While, yes, filing for bankruptcy does mean that person’s credit score will take a hit for a period of time, it will rebound eventually if all goes smoothly.

The filer should expect to have limited access to credit because of this credit score hit for a few years. But over time, the filer will rebuild his or her finances, and their credit score will steadily improve. In fact, a filer can expect to receive offers for credit card and secured credit within a few years after their debts are discharged.

It far outweighs the alternative which involves collections law suits, judgments and wage garnishments, which can also have an even larger hit to someone’s credit score.


An experienced Texas bankruptcy lawyer can help you with any questions you may have about how the bankruptcy process can help you manage your debts and rebuild your credit. Call the Law Office of Marilyn D. Garner at (817) 505-1499 now for a free consultation to discuss how bankruptcy may help you.

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