Bankruptcy is often viewed negatively. There’s a stigma attached to it with many people believing it’s the worst thing that can happen to a person’s finances. The truth is that bankruptcy can be a viable solution to a debt problem and that people DO recover from it. Understanding exactly what bankruptcy is can go a long way to ending the misperceptions about people who make this choice. Knowledge can also help a person decide if this is the right choice for them.
Here are some common beliefs about bankruptcy that are actually false.
- Bankruptcy will eliminate all of your debt. While you may be able to get many of your consumer debts forgiven, there are some debts that cannot be discharged. If you owe money for alimony, child support, student loans, or restitution for a criminal act including fraud, you will still have to pay these after bankruptcy.
- You’ll have bad credit forever. A bankruptcy will stay on your credit report for 10 years, but you can work to rebuild your credit right away. It won’t be as easy as for someone with excellent credit, that’s true. However, as time goes by you can explore options such as a secured credit card or a bad credit car loan, both of which can help improve your credit score.
- Only people who are looking to game the system file for bankruptcy. Sure, there are people who take out loans they can’t repay and max out credit cards just to file for bankruptcy and get their debts forgiven. But this is fraud and bankruptcy courts frown upon it, to say the least. The truth is that most people who file for bankruptcy do so after a life changing event such as a divorce, a serious illness or a layoff or other unemployment situation. Even with the best of intentions, life can surprise us and leave us unable to pay our bills. There’s no shame in asking for help to get out of that situation.
- It’s too hard to file bankruptcy or, conversely, it’s really easy to file bankruptcy. It’s somewhere in the middle. You can do it without an attorney, but an attorney can help you navigate some of the more complicated parts of the process. An attorney can also guide you as to which assets you’ll be required to liquidate.
- You’ll have nothing left after bankruptcy. Speaking of liquidation, many people believe that they’ll have to sell off everything they own to file. The laws vary in each state, but they are set up such that some assets are protected and exempt from liquidation. Some assets such as your house, household items and clothing, and possibly your car may be exempt. You will most likely not be left homeless (you’ll just have to keep paying the mortgage!).
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