Four Common Fallacies About Bankruptcy

1. If I file for Bankruptcy my Credit Will be Destroyed
Yes. Bankruptcy has a serious negative impact on your credit. Will it be destroyed? No. Once you file for bankruptcy, all of your dischargeable debts are removed from your credit report, and they are replaced with "discharged in bankruptcy".

What does this mean for your credit?
Essentially, there are two parts to this credit equation. First, the bankruptcy itself is definitely a harmful item to have on your credit report. Second, however, is the fact that your outstanding debt is significantly reduced if not eliminated alltogether. This second part actually makes you a less risky candidate for borrowing money. Simply put, you are much more likely to repay new debt easily if you don't have a lot of other debt to worry about.

The End Result
Immediately after your bankruptcy, you will have a hard time obtaining new credit. However, if you are diligent about keeping up on your regular payments, you can get your credit score back up above 700 in a year or two.

Honestly, most people who file for bankruptcy will get new credit card offers in the mail after only a couple months, albeit at a higher interest rate.

For more information, see this guide on bankruptcy and your credit.

2. Bankruptcy is the End of my Financial Life
Quite the contrary. Bankruptcy is the beginning of a new financial life. Once you file for bankruptcy and complete your case, you are essentially starting over with a clean slate. No more creditor calls, debt collectors, unmanageable monthly payments.

Bankruptcy laws help people to get a fresh start so they can get out of their debt hole and move on with their life.

3. The Bankruptcy Court will Take All of my Stuff
Wrong again. While there is the possibility of losing certain "luxury items" in the common chapter 7 bankruptcy case, like an expensive boat you own outright or a vacation home, most people simply don't have such assets. This is why most people who file this type of bankruptcy lose nothing and get rid of all their debts.

Now, in cases where there are significant assets that are not protected by bankruptcy exemptions, then you attorney would advise you to file a chapter 13 instead. This type of bankruptcy takes longer and requires a monthly payment plan, but you can still get rid of much of your debt with zero risk of losing any assets.

Learn more about what happens to your property in bankruptcy.

4. I'm Not Eligible for Chapter 7 so I Still Have to Repay my Debt in Chapter 13
This is another inaccurate statement. In a chapter 13 bankruptcy, you do get into a three to five year payment plan, but the monthly payment has much less to do with how much you OWE, and much more to do with how much you MAKE.

For Example
Imagine you owe $50,000 in credit card debt and the average interest rate is 15%. At this rate, the interest payment alone would be over $600 per month. To pay it off in five years would require about $1,200 per month.

Now, in a chapter 13 bankruptcy plan, your monthly payment is dependent on your monthly income after expenses. Imagine you make $50,000 per year. After taxes your monthly income would be roughly $3,000. After rent or mortgage, bills, food, clothing, 401k contributions, etc, your DISPOSABLE income is probably somewhere around $500.

That $500 is all that can be used for your chapter 13 plan payment. So instead of paying $1,200 per month, you pay $500 or less.

The Bottom Line
In most chapter 13 cases, people end up repaying anywhere between 5% and 50% of their debt, depending on how much income they make. Not to mention it can stop a foreclosure, "cure" past due mortgage payments and even remove a second mortgage.

Chapter 13 is a VERY powerful tool.