Bankruptcy, also termed Chapter 7 or Chapter 13 bankruptcy in the US, is a state in which a person or a company is declared in law as unable to pay off their debts. As much as this term sounds bad, it actually is not a bad thing. Since it is a legal status, it has to be filed for by the debtor. The debtor is then declared insolvent and is accorded some form of protection. Bankruptcy can actually help you get rid of certain debts and actually give you a fresh start.
Every country has its own bankruptcy code, but there are several things they all have in common. For example in the USA, there are about 6 types of bankruptcy. These are located in the bankruptcy code, at title 11 of the United States Code. Each of them has a Chapter dedicated, such as Chapter 7 for straight bankruptcy, Chapter 9 for municipal bankruptcy, Chapters 11, 12, 13 and 15. In England and Wales, a large part of the law on bankruptcy is derived from the insolvency act of 1986. Canada derives its laws from the bankruptcy and insolvency act and applies to both businesses and individuals. These are just a few examples of how each country has developed its own code for bankruptcy.
Here, we shall discuss the main myths that go round, and actually, explain what happens.
1. You Must Be In Default Of Your Debts To Qualify For Bankruptcy
This is a false belief held by many people. All across the world, anyone with a debt can file for bankruptcy. There is actually no requirement that you need to have defaulted some payments to file bankruptcy. Bankruptcy is always an option if you anticipate that your income will not be enough to sustain you and pay off debts as well. This will actually help prevent problems with creditor collection actions. The only difference that may exist in different countries is the amount of debt one should have before filing bankruptcy. For example, in Canada, one has to have a debt of at least $1000, in Australia, the debt must be at least $5000 while in Scotland, and your debt must be more than €1500.
2. You Will Lose All Your Assets If You File Bankruptcy
There are many who actually believe that bankruptcy actually means losing your house, car, and any other assets you own. In as much as you may lose some of your assets and property, in most cases, you don’t lose much. Keeping your property also depends on the value of the item as well as applicable exemptions. The exemptions applied will actually depend on your country, as well as the state you are in. In this case, you will need to involve a bankruptcy expert or attorney, in order to know what you will lose.
3. All Your Debts Will Be Relieved
This is a false belief. In as much as bankruptcy allows you to get rid of certain debts ‘without paying them’, there are exceptions. There is a general rule, that you cannot have forgiven or discharge debts you are personally responsible for. These include student loans, recent taxes, and child/family support. On the other hand, you may discharge debts for example from personal loans, medical bills, credit cards.
4. Bankruptcy Will Ruin Your Financial Future
This and the inability to own property again are untrue beliefs. The bankruptcy laws intend to allow one a fresh start. This fresh start includes the ability to own vehicles, real estate ventures and whatever property you had before filing bankruptcy. There are also those who believe that you will lose your job if you file bankruptcy. It is actually illegal for an employer to terminate employment just because one has filed bankruptcy. This gives you the ability to start fresh.
5. Filing For Bankruptcy Is A Personal Admission To Failure
Many have the idea that bankruptcy is an admission of character flaw or failure rather than a good financial remedy available for a reason. Sometimes, in many cases, bankruptcy is not due to a failure in someone’s abilities, or due to their behavior. Actually, most of the time it may be due to medical bills from medical emergencies. Whatever the reason for filing bankruptcy, take it as a tool to help you take better control of your finances.
6. You Will Never Get Credit Again
It is true that you may not have access or limited access to credit. You may even have to pay higher interest rates for about 7-10 years. Your credit score is more likely to bounce back after filing for bankruptcy. Also, there are more options to use to restore credit after bankruptcy. You can get a secured credit card, even though it has limitations. Taking advantage of a financial product presented to you will actually help you on the right path to securing your financial future.
7. If You Are Married, Both You And Your Spouse Must File For Bankruptcy
Married couples may decide to file bankruptcy together. This, however, is not a requirement, as a single person can file for bankruptcy. If only one spouse files, you should know that the owned assets will be treated as the property of the bankruptcy estate. The other spouse’s credit will, however, remain unaffected. However, if there are joint debts and the other spouse doesn’t file, they will be liable for those debts, and not any other.
Also, note that filing bankruptcy rarely causes one to go to jail. This only happens in circumstances such as when there are fraudulent sworn statements or conveyances without disclosure.