The Five Most Common Bankruptcy Misconceptions
In these tough times, it’s hard to be unconcerned about how you or I would fare amidst the economic downturn we’re all in. The global financial recession has made even long-standing institutions feel the impact that even private individuals need to scrape very hard for a living. It is also during these tough economic times that people dread saying that one word that sends chills down everybody’s spine – bankruptcy. We’ve all seen it happen even to the best and most stable companies. We’ve also seen how some institutions are resorting to desperate measures just to prevent their companies from going bankrupt. From big companies to your next door neighbor, the threat of bankruptcy looms close especially in these times. We learn about companies going bankrupt in the news. We also read about bankruptcies in the Internet.
However, despite the scary stories about bankruptcy, we also hear some good things about it. Some say that those who file bankruptcies can get away without paying their taxes and even the purchases that they have made.(1) Though there may be some truth behind this assumption, there is still a lot to learn as to how bankruptcy can actually be helpful to the financially challenged.
Declaring bankruptcy is actually a right afforded to people who are in dire financial situations and who can no longer fulfill their financial obligations to the state, to financial institutions, and to their lenders. In the US, there are two kinds of bankruptcies that people can file for — liquidation bankruptcies (Chapter 7) and reorganization bankruptcies (Chapter 13). Each type of bankruptcy helps a person or an entity in a state of financial trouble. To set the record straight, here are some myths and misconceptions that will be clarified and explained in order to give a clearer definition of bankruptcy.(2)
Bankruptcy Myth #1: Declaring bankruptcy is embarassing
A lot of people think that declaring bankruptcy is embarrassing, once word gets out that you can no longer pay for your mortgage or even for a purchase at the grocery. Friends and family may take pity on you, but at the back of everyone’s minds is a persistent sense of distrust. Being in this situation is unsettling; however, embarrassment can be avoided by keeping your bankruptcy status to yourself or just to the select people you want to inform. Financial institutions and your creditors are also bound by law to keep this information discreet and confidential. Unless you’re someone prominent enough to consider the attention of the media, you shouldn’t have any problems in keeping your financial status a secret.(3)
Bankruptcy Myth #2: You have zero chances of applying for a new loan or credit once you’ve declared bankruptcy
Credit hounds are the most thorough background investigators because the nature of their business entails that they put a lot of their trust and their money on people. A bankruptcy is certainly not something that would slip past their noses, but it certainly won’t cut your chances of getting a credit card or a loan.(4) A bankruptcy, however, can affect the terms and the cost of interest that a credit company or a lender will offer to you. Bankruptcies stay on your records for, at most, ten years; however in these troubled times, if credit companies chose to forego anybody with a bankruptcy in their records, they themselves would go bankrupt. As a precaution instead, credit companies and lenders will offer different terms and rates in order to ensure their financial safety as well as yours.
Bankruptcy Myth #3: Bankruptcy will take away everything you own
People often dread filing for bankruptcy under the assumption that their lenders and other financial institutions will close in on all of their properties. While this may prove true for properties such as real estate that have been mortgaged, there are limits as to what the banks and other institutions can take away from a bankrupt individual or entity. Bankruptcy laws differ from state to state and most laws offer protection to some assets and properties such as vehicles and real estate.(5) In order to get back any property that has been repossessed already, you should be able to pay off the loans for it before the government or a private lender sells it. Otherwise, if you haven’t paid off your loans, then there’s a bad chance you’ll lose property due to bankruptcy. A bankruptcy should allow you to regain your chances at financial responsibility, and it would be next to impossible if the banks and the government would take away everything that you own.
Bankruptcy Myth #4: You must be totally broke to declare bankruptcy
People often have a misconception that those who file for bankruptcy have already reached the end of their lines. This is definitely not true. In fact, you can declare bankruptcy even if you still have a few assets left to your name. You can even file for bankruptcy even if you have a spouse who has relatively a stable income. Bankruptcy claims are filed when the individual or entity can no longer fulfill his or her financial responsibilities to the state or to lenders. However, you don’t have to be jobless, homeless, or even penniless to file for bankruptcy.(6)
Bankruptcy Myth #5: If you file for bankruptcy, you can skip out on the taxes and other bills
This is where the two types of bankruptcy can help you and limit you when it comes to the financial aid that you can get. With a Chapter 7 bankruptcy, you allow the government to repossess your assets and sell these off to pay your debts. However, this kind of bankruptcy will have you living within a certain kind of lifestyle for a period of years. Chapter 13 bankruptcy, on the other hand, is a type of bankruptcy that allows you to skip out on a few taxes. However, certain financial responsibilities such as child support and student loans among others must still be fulfilled on a timely basis.(7) A Chapter 13 bankruptcy doesn’t actually free you from paying debts, but rather helps you schedule a payment system that can go on from three to five years.
SOURCES:
(1) http://moneycentral.msn.com/content/Banking/bankruptcyguide/P77617.asp
(2) http://financialplan.about.com/cs/creditdebt/a/Bankruptcy.htm
(3) http://moneycentral.msn.com/content/Banking/bankruptcyguide/P77617.asp
(4) http://www.arizonadebtrelief.com/11%20Misconceptions.htm
(5) http://www.arizonadebtrelief.com/11%20Misconceptions.htm
(6) http://www.nysscpa.org/cpajournal/2005/505/perspectives/p18.htm
(7) http://www.bankrate.com/brm/news/bankruptcy/20051219a1.asp