While bankruptcy can give consumers a fresh financial start, it is important to have a clear understanding of how bankruptcy works, including the potential risks associated with bankruptcy. Here are five common myths about bankruptcy to give you a better understanding of the process and the consequences of filing Chapter 7 or Chapter 13 bankruptcy in Tennessee.
Myth #1: People who file bankruptcy are irresponsible. Even though debt is often linked to some kind of abuse, most people who have serious financial problems have faced a life crisis such as a job loss, illness, accident, or divorce. The compounding of a life event with already troubled financial circumstances can leave any household struggling with debt.
Myth #2: Bankruptcy eliminates all past debts. While bankruptcy can help to eliminate unsecured debt, it does not eliminate judgments or court orders, including child or spousal support obligations. You will also not be able to eliminate student loan debt or taxes.
Myth #3: You can spend freely right before filing without having to repay debts. Some people assume they can rack up credit card debt before filing and then have those debts discharged. Courts have considered this fraud and if you charge right before you file, you will still be liable for those debts.
Myth #4: Bankruptcy permanently ruins credit. Immediately after filing bankruptcy, you may start seeing credit offers in the mail. Secured credit cards (requiring a deposit) with low limit credit lines can often be obtained within months. When you start making regular, on time payments, you can begin to see an increase in your credit score. You should always keep an eye on your credit report to make sure debts are properly discharged. Some bankruptcy filers are able to obtain a mortgage within two or three years.
Myth #5: Bankruptcy will solve all of your money problems. Unfortunately, while bankruptcy can discharge a significant portion of your debts, it is not a "cure-all" solution. Chapter 7 could mean the loss of some property and Chapter 13 could require years on a payment plan. In either case, you should change your spending habits and learn to live on a budget after bankruptcy.
Source: USA News & World Report, "5 Bankruptcy Myths Debunked," Susan Johnston, May 14, 2012