Bankruptcy
Myths vs. Reality
Common Misconceptions About Bankruptcy Explained
Many people don't consider bankruptcy as a solution to their financial problems because of widespread myths and misconceptions. Bankruptcy is a legal process designed to help individuals overcome overwhelming debt and regain financial stability. At Fresh Start LA, we believe in providing accurate information so you can make informed decisions about your financial future. This resource addresses and dispels common bankruptcy myths to help you understand the reality of this debt relief option.
Common Myths vs. Reality
Myth: Because the bankruptcy laws have changed, filing for bankruptcy is no longer an option.
Reality:While bankruptcy laws have indeed changed over the years, bankruptcy protection remains available and accessible to most people facing financial hardship. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act added requirements like the means test for Chapter 7, but complete debt relief is still possible for many individuals. Even if you don't qualify for Chapter 7, Chapter 13 reorganization can still provide significant debt relief and protection from creditors.
Myth: If I file for bankruptcy, I will lose everything I own.
Reality:This is perhaps the most common and harmful misconception. In reality, bankruptcy laws include generous exemptions designed to protect your essential assets. Most Chapter 7 filers keep all their possessions, and California's exemption system specifically protects equity in homes, vehicles, retirement accounts, and household items. Chapter 13 bankruptcy allows you to keep all assets while repaying a portion of debts through a structured payment plan.
Myth: After bankruptcy, I will never be able to get credit again.
Reality:While bankruptcy does impact your credit score initially, it also eliminates debt that was hurting your credit. Many clients receive credit offers shortly after discharge, and with responsible financial management, you can begin rebuilding credit immediately. Most bankruptcy filers see their credit scores begin to recover within 12-18 months, and many qualify for mortgages within 2-3 years of discharge. Bankruptcy can actually be the first step toward rebuilding a stronger credit profile.
Myth: Bankruptcy is an expensive and complicated process.
Reality:With proper guidance, bankruptcy can be straightforward and cost-effective compared to continuing to struggle with overwhelming debt. While there are filing fees and attorney costs, these are typically a fraction of what you'll save through debt elimination. The typical Chapter 7 case completes in 3-6 months with just one required meeting, and the paperwork is handled primarily by your attorney. Most clients find the process much more manageable than they anticipated.
Myth: Tax debts cannot be discharged in bankruptcy.
Reality:Contrary to popular belief, certain tax debts can be eliminated through bankruptcy. Income taxes may be dischargeable if they meet specific criteria: the taxes are at least three years old, the tax returns were filed at least two years ago, and the tax assessment is at least 240 days old. While not all tax obligations can be discharged, bankruptcy can provide options for managing tax debt, including negotiating payment plans for remaining obligations.
Myth: Filing bankruptcy means I've failed financially.
Reality:Bankruptcy is a legal right established by federal law specifically to help people recover from financial setbacks. Many successful individuals and businesses have used bankruptcy as a tool for financial recovery. Economic hardships, medical emergencies, job loss, and divorce – circumstances often beyond one's control – are the most common reasons people file. Bankruptcy should be viewed as a financial tool that can help you move forward, not as a personal failure.
Myth: Everyone will know I filed for bankruptcy.
Reality:While bankruptcy filings are public records, they aren't publicized or reported in local news (unless you're a public figure). Most people never learn about your filing unless you tell them. Your employer generally cannot fire you for filing bankruptcy, and in most cases, they won't even know about it unless you have wage garnishments that stop after filing.
Myth: I can pick and choose which debts to include in my bankruptcy.
Reality:Bankruptcy law requires you to list all debts, even those you wish to keep paying. However, you can voluntarily repay certain debts after bankruptcy if you choose to. For secured debts like mortgages and car loans, you can often keep the asset by continuing payments through reaffirmation agreements. This gives you legal protection while allowing you to maintain important assets and relationships.
