The good people at Merriam-Webster define the word myth in two starkly different ways. The first is that a myth is a traditional story that serves to illuminate a world view, or explain a practice, belief or natural phenomenon. This version is quite pleasant, and reminds us of folklore, mythology, fables, epic tales of good vs. evil, and so on. But the second version is markedly less inspiring.
That’s because a myth is also defined as an unfounded or false notion. And unfortunately, that’s the version that applies for many people when they try and make sense of the complex and thorny issue of filing for bankruptcy.
“The word bankruptcy itself is part of the problem, because it sounds like a moral failing, when in fact it’s a legal status,” commented Charles Huber, a Missouri-based bankruptcy attorney and principle of the Law Office of Charles H. Huber. “It is essentially a process of restructuring and resolving an unsustainable debt problem. Far from being an irresponsible act, for some people filing for the appropriate bankruptcy chapter can be a very responsible decision, and the courts clearly recognize this — even if some creditors don’t.”
Naturally, neither this (nor any other) article can cover what you need to know about filing for bankruptcy. However, if it’s something that might be on your financial radar screen in the future, then allow me to slay three persistent bankruptcy myths so they stay out of your way, and won’t pull you in the wrong direction as you move ahead:
Myth #1: Filing for Bankruptcy is Typically for People Who Mishandle Money
Fact: The majority of people who file for bankruptcy are not ultra-risky “let’s take out a second mortgage and over-invest in a stock that we know nothing about” types. They’re ordinary, regular people who are in an ever-deepening financial hole because they lost their job, have crushing medical bills to pay, lost their homes due to natural disaster, got divorced, trusted someone incompetent or deceitful to handle their money, and so on. Of course, it’s also true that some people who file for bankruptcy are largely responsible for their financial trouble. But their proportion in the overall mix — and we’re talking hundreds of thousands of bankruptcy filers per year — is much, much smaller than most people believe.
Myth #2: Bankruptcy Discharges All Debts
Fact: While it’s true that bankruptcy does indeed clear many debts (or to be more precise, non-exempt assets are liquidated and the proceeds are used to pay identified creditors per legal rules), the fact is that some debts stick around. For example, alimony, child support, student loans (unless financial hardship is proven as part of a separate legal filing), and restitution orders due to a crime still must be paid. These debts won’t be wiped off the books.
Myth #3: Bankruptcy Permanently Destroys a Credit Rating
Fact: This is the most common myth, and it’s also the worst one. Yes, filing for bankruptcy will severely damage a credit rating, and will be on the record for 10 years. That’s serious. But the belief that this damage is permanent is simply incorrect. Within a few months of filing, people typically start getting offers for secure credit cards, and then offers for conventional credit cards in about a year. Provided that everything is paid on time and as required, getting approved for a mortgage after a few years is not uncommon.
The Bottom Line
Bankruptcy is scary — there’s no other way to say it. But the best way to deal with this fear is by getting educated, so that you can make an informed decision on whether filing for bankruptcy is your best option (or perhaps better stated, your least-worst option). Steering clear of the above myths will go a long way towards helping you make this very important determination.