Sometimes, a fresh
start makes sense -- if you can get past
what you think
you know. Here's how bankruptcy affects
your credit, your possessions and
Like most big, bad, scary things,
bankruptcy has a reputation based on a
tidbits of truth and lots of
embellishment. And like most creepy
it's not nearly as frightening once you
know the truth.
With a mind toward declawing the
monster, here are a dozen misconceptions
Everyone will know I've filed
for bankruptcy. Unless you're a
person or a major corporation and the
filing is picked up by the media, the
chances are very good that the only
people who will know about a filing are
your creditors. While it's true that
bankruptcy is a public legal
proceeding, the numbers of people filing
are so massive, very few
publications have the space, the
manpower or the inclination to run all
All debts are wiped out in
Chapter 7 bankruptcy. You wish.
Certain types of
debts cannot be erased. They include
child support and alimony, student
loans and debts incurred as the result
of fraud. If you've defrauded someone
and a judgment has been made against
you, that won't be erased either.
I'll lose everything I have.
This is the misconception that keeps
really should file for bankruptcy from
doing it, says Chris Viale, chief
operating officer of Massachusetts-based
Cambridge Credit Counseling.
"They think the government will sell
everything they have and they'll have
to start over in a cardboard box," Viale
While the bankruptcy laws vary from
state to state, every state has
exemptions that protect certain kinds of
assets, such as your house, your
car (up to a certain value), money in
qualified retirement plans, household
goods and clothing.
"For most people, they'll pass through a
bankruptcy case and keep everything
they have," says John Hargrave, a
bankruptcy trustee in New Jersey. If you
have a mortgage or a car loan, you can
keep those as long as you keep making
the payments (like the rest of us).
I'll never get credit again.
Quite the contrary. It won't be long
you're getting credit card offers again.
They'll just be from subprime
lenders that will charge very high
interest rates. "There are innumerable
companies that will provide credit to
you," says California bankruptcy
attorney and trustee Howard Ehrenberg.
"I don't advise any of my clients to
run out and run up the bills again, but
if someone does need an automobile,
they can go and will be able to get
credit. You don't have to go underground
or something to get money."
However, if you're planning to buy a
house or a car, you might want to do
that before you file. Those loans will
be tough to get, and the higher
interest rate on such a large purchase
would make a significant impact on
your payments. Also, if you have a
credit card with a zero balance on the
day you file for bankruptcy, you don't
have to list it as a creditor since
you don't owe any money on it. That
means you might be able to keep that
card even after the bankruptcy.
If you're married, both spouses
have to file for bankruptcy.
necessarily. "It's not uncommon for one
spouse to have a significant amount
of debt in their name only," Hargrave
says. However, if spouses have debts
they want to discharge that they're both
liable for, they should file
together. Otherwise, the creditor will
simply demand payment for the entire
amount from the spouse who didn't file.
It's really hard to file for
bankruptcy. It's really not.
You don't even
technically need an attorney. However,
it's not recommended to go through
the procedure without one.
Only deadbeats file for
bankruptcy. Most people file
for bankruptcy after a
life-changing experience, such as a
divorce, the loss of a job or a serious
illness. They've struggled to pay their
bills for months and just keep
falling further behind.
I don't want to include certain
creditors in my filing because
important to me to pay them back someday
and if the debt is discharged, I
can't ever repay them. Bless you for
even thinking about such a thing.
You're no longer obligated to repay
them, but you always have that
opportunity. If your conscience won't
let you sleep nights because you
didn't pay your debts, there's nothing
in the bankruptcy code that prevents
you from doing that once you're back on
your feet. But bankruptcy is an
all-or-nothing deal, so you have to
include all your creditors in the
Filing for bankruptcy will
improve my credit rating
because all those debts
will be gone. That sounds like an ad for
a bankruptcy lawyer trolling for
clients. Filing for bankruptcy is the
worst 'negative' you can have on your
credit report. Unlike other negatives,
which stay on your report for seven
years, bankruptcy can be there for 10
You can't get rid of back taxes
through bankruptcy. Generally
is true. However, there is such a thing
as tax bankruptcy, says tax educator
Eva Rosenberg, known on the Web as Tax
Mama. To get a shot at it, you have
to file all your returns and the taxes
owed need to be at least three years
You can only file for bankruptcy
once. The truth is, you can
only file for
Chapter 7 bankruptcy once every eight
years, Hargrave says. (Before the new
bankruptcy law passed in 2005, you could
file every six years.) For Chapter
13 reorganization, you can file more
often than that, but you can't have
more than one case open at the same
time, he says.
Of course, that doesn't make it a good
"Multiple bankruptcies are really bad,"
Rosenberg says. "Many people get
into the habit of once they've done it,
it becomes a way of life. This is
not good for your karma." Or your credit
I can max out all my credit
cards, file for bankruptcy, and
never pay for
the things I bought. That's called
fraud, and bankruptcy judges can get
really cranky about it. The trustee in
your case will review all your
purchases right before your filing. He
knows what to look for.