Bankruptcy has long been clouded by a lot of myths and misconceptions. Many resist bankruptcy, fearing losing everything they own or being labeled financially irresponsible. But neither of these things is true. In fact, if you find yourself sinking in debt, bankruptcy might be the only way to right the ship.
Misinformation about bankruptcy myths can mislead people, leading to poor financial decisions, unnecessary stress, and missed opportunities. Debunking these myths is essential for anyone considering bankruptcy or trying to understand its implications.
Here are the most common bankruptcy myths.
While filing for bankruptcy negatively impacts your credit, the extent varies depending on multiple factors. One thing is for sure — bankruptcy will not permanently damage your credit. You might initially experience a slight hit, but you can rebuild your credit over time because you eliminated existing debt, and ultimately, your debt-to-income ratio (your income compared to the amount of debt you’re in) will improve.
The amount of time bankruptcy appears on your credit report depends on the type of bankruptcy you filed. A Chapter 7 bankruptcy remains on your report for ten years, and a Chapter 13 bankruptcy stays for seven.
You will not be out on the streets if you file for bankruptcy. Also, creditors won’t take your most valuable assets. You’ll be glad to know that Minnesota’s asset exemption laws are incredibly lenient. For example, up to $450,000 of your home’s equity is exempt from liquidation. Your car, clothes, and precious valuables like wedding rings are also safe from creditors. A Minnesota bankruptcy can even be a non-asset case, meaning you won’t lose any assets.
While bankruptcy allows you to build back your wealth, life happens. You might suffer from a severe injury or illness, get divorced, or lose your job. In some cases, you might experience all three. This could force you to consider filing for another bankruptcy. Luckily, you can file for bankruptcy as often as needed. However, there is a waiting period in between filings.
For Chapter 7 bankruptcies, you must wait eight years and two years to file for another Chapter 13 bankruptcy. Note that a Chapter 13 bankruptcy repayment plan may take longer than two years. Once you complete your plan, you can then file for bankruptcy again.
If you feel like the only one filing for bankruptcy, think again. In 2022, there were $387,721 total bankruptcy filings. Most of these bankruptcies were filed because of past-due medical bills, divorce, and job loss — not because filers mismanaged their finances.
One in ten adults has at least some medical debt. And almost a third of single-person households couldn’t pay a $2,000 bill. Recent data from the Bureau of Labor Statistics revealed 514,000 new unemployed individuals, increasing to 6.4 million nationwide. Lastly, the average cost of divorce in the U.S. is between $15,000-$20,000. Considering the costs associated with the three circumstances listed, it’s not hard to believe that a well-to-do individual might have to file for bankruptcy. So, don’t feel shame in filing or think of yourself as financially irresponsible.
Sometimes, filing for bankruptcy is the most financially responsible decision you could make. Now that you’ve finished making payments on your debt, you can invest that money and begin to build up your finances again.
Bankruptcy will discharge most of your debt, but not all of it. You can expect to have your medical bills, utility bills, credit card debt, and personal loans discharged in bankruptcy. However, debts like student loans, child support, and alimony cannot usually be discharged. There are situations where you could discharge student loans by claiming “undue hardship.” In this case, you must prove the following:
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