The truth about common bankruptcy myths

There are many complicated aspects of bankruptcy that can lead to some misperceptions among consumers.

When the nation's economy plummeted in 2008, many people suffered serious financial setbacks. Job losses, foreclosures, bankruptcies and more all increased dramatically as a result. While the general economic outlook in Utah and the rest of the country has improved since then, things are far from perfect for many consumers.

People who continue to face financial challenges or who may be experiencing new problems that are unrelated to the recession may wonder what debt relief options exist. Bankruptcy may be considered but sometimes too quickly dismissed due to things heard through the grapevine. This is a shame as that grapevine is often inaccurate and may stand in the way of someone getting the assistance they need.

What are some common misconceptions about bankruptcy?

From future credit opportunities to the types of debt that can be included in bankruptcy, many myths about bankruptcy abound. Four of the most common misconceptions are:

  • All owned homes are lost in bankruptcies.
  • Bankruptcy filers will never be able to get mortgages again.
  • Bankruptcy can be used to eliminate all forms of debt.
  • Once a bankruptcy is over, all included debts are wiped from record.

As with any type of myth, these beliefs stem from some related truths but they are far from accurate.

How are homes handled in bankruptcy?

Home ownership in bankruptcy can be handled in a variety of ways. One option to keep a home is to file a Chapter 13 bankruptcy. This type of plan is essentially a restructuring of debts for repayment purposes. Assets are not lost in this process.

In Chapter 7 bankruptcies, assets are subject to be given up in order to repay debt. However, as pointed out by Forbes, there are designated exemptions which allow consumers to keep assets with values up to certain amounts. If the equity in a home is below the threshold for that exemption, the home may not be lost.

What are future homeowner options?

An article in the New York Times discusses how people with prior bankruptcies can still obtain new mortgages. One thing that can enable this is the ability to show a potential lender how a current situation is different than the one leading up to the bankruptcy. By differentiating between the two, consumers allow banks to feel more confident about lending money at the present time.

What types of debt cannot be included in a bankruptcy?

According to the American Bankruptcy Institute, there are some debts that cannot be eliminated via bankruptcy. These include student loans, child support, alimony and any debts incurred through criminal or fraudulent acts.

What happens after bankruptcy?

Bankruptcy can eliminate debt but does not eliminate all record of debts. Consumers should be prepared for all debts to remain on their credit reports for some time. The discharged status will be noted once a bankruptcy is complete so that potential creditors know that there is no outstanding debt associated with the items.

What debtors should do?

People in Utah who are looking for ways to reduce their debt load may wish to evaluate bankruptcy. Talking to an attorney is recommended to help understand the different forms of bankruptcy.