Like many in New York who find themselves struggling with overwhelming debt, you may shy away from filing for bankruptcy due to the potential immediate and long-term consequences. Bankruptcy is not a step you should take lightly, but much of its frightening reputation comes from embellishments of the truth and falsehoods.
Clearing up some of the common misconceptions regarding filing for bankruptcy may help you determine if it is the right option for your situation and needs.
Myth 1: Bankruptcy will cost you all your property
To get the financial relief bankruptcy offers, you must surrender all your property and assets of value. Although a widely held belief, this is not the case. Through a Chapter 7 bankruptcy filing, your trustee may seize and liquidate certain nonexempt property to apply the proceeds to your outstanding debts. However, primary residences, home goods and primary vehicles often qualify as exempt.
Myth 2: Bankruptcy wipes away all your debt
Viewed as a potential trade-off for giving up your property, many incorrectly believe that filing for bankruptcy releases them of their personal liability for all their debts. This is not the case, though. According to the U.S. Courts, federal law provides an exemption from discharge for 19 categories of debt. The most common debts not eligible for discharge, include certain tax claims, amounts owed for spousal or child support, government-funded or guaranteed educational loans, settlements or judgments resulting from personal injury claims, and funds owed for certain governmental penalties and fines.
Myth 3: A bankruptcy filing destroys your credit
You may have the impression, like others, that filing for bankruptcy inflicts lasting damage on your credit. Your filing remains as public record for 10 years after your filing; however, other bankruptcy references, such as those relating to the collection of debts and financial obligations discharged through your filing, stay on your credit report for only seven years. You may see your score improve as those items disappear from your report and as you take action, including making on-time payments, adding new credit and maintaining a credit utilization rate of less than 30% on your credit card balances.