5 Misconceptions About Filing Bankruptcy

Many people have a negative reaction when they hear the word “bankruptcy” - which keeps consumers that are too deep in debt to dig out from considering it a solution. This unfavorable perception can keep you from getting the financial relief you need and deserve. Today we'll take a look at five of the biggest misconceptions surrounding bankruptcy and why you should reconsider if you're struggling with unmanageable debts.

Misconception #1 – You will lose your house and car

The whole idea behind bankruptcy is to shed debt you can no longer pay while protecting your assets. If you are current on your car and house payments and aren't driving a to of the line sports car or living in a mega-mansion, you should not be at risk of losing them. If you are behind on car or mortgage payments, filing Chapter 13 can stop a foreclosure or repossession. And if you are upside down on your mortgage or car loan and would prefer to unload the debt and the asset because it's not longer worth what you paid, a Chapter 7 offers an escape hatch.

Misconception #2 – Your credit will be ruined

If you're behind on your bills to the point that you're considering bankruptcy, your credit is likely already not so hot. And if you continue as you are, your credit score will keep on dropping every month. With a bankruptcy, your credit will take a one-time dip then will begin to rebound. And there are steps you can take to improve your score deliberately month after month. Continuing to wallow in debt you can't afford is the sure way to ruin your credit, not filing bankruptcy.

Misconception #3 – You will be publicly humiliated

Not only will no one likely know that you filed bankruptcy, but also there is no stress involved in the process. You will not be chastised in court or made to feel bad about yourself. The hearings are a formality that go by very quickly and with little fanfare. You typically have to appear twice in court – once at your credit hearing and once at your actual bankruptcy hearing. At the 341 Meeting of Creditors, often no creditors show up. And at the other hearing, you answer yes and no questions then you're done. No embarrassment involved.

Misconception #4 – You can lose your job

There is no reason your employer will know about your bankruptcy filing unless you tell them. In fact, filing bankruptcy can help you keep your job. If your job relies on a decent credit rating, filing bankruptcy can help you protect your position if you're falling behind on your bills. And if you have a security clearance, if your credit takes a nose dive, you can lose your clearance and then your job. You must also consider that financial stress can distract you from your job and lower your performance and efficiency. Getting debt free can be much better for your career.

Misconception #5 – You will pay a lot of money to file bankruptcy

It's just not true that it is terribly costly. While the court costs for Chapter 7 and 13 have increased in recent years, they are still affordable. What's more, unloading debt you can't pay will increase your cash flow greatly, even after you take into account filing fees and attorney costs. Attorney fees are not only reasonable, but you can likely get a zero down payment plan or pay your fees in installments. In the long run, filing bankruptcy when you're living paycheck to paycheck and seeing interest, late fees and penalties accumulate, is the much cheaper route.