Bankruptcy: Myth vs. Reality
I’ve got good and bad news. First, the good: New Chapter 13 bankruptcy laws are about to make it easier than ever to avoid foreclosure (check out the last few posts on this blog to see what I mean). Now, the bad: Millions of Americans risk missing out on this golden opportunity because of some unfortunate myths that persist about bankruptcy.
With foreclosures at an all-time high, it’s time to put those misconceptions out to pasture. Read on for the reality behind the most common Chapter 13 questions. For even more myth-busting info, stop by our online video library and bankruptcy solutions page.
Myth #1: Bankruptcy will ruin my credit and/or reputation
Not true. Look at it this way. What’s your credit like right now? If you’ve been missing mortgage payments, chances are you’re late on other bills as well—not good for the FICO. Even if you’re making minimum payments, you’re still in debt. And that hurts your credit score.
Here’s the truth. Yes, creditors will see that you filed for bankruptcy. But this means they’ll also know you’ve been making an effort to get out of debt. By token, this will make you less of a risk in the long run. Remember, once you complete your bankruptcy payments, all remaining debts are cleared. It’s a fresh start, which goes a long way towards repairing credit.
As for your reputation, ask yourself what you would rather risk. Having your family/friends/boss find out you’re using bankruptcy to overcome debt or having them watch the bank kick you out of your home? I think they’d be a lot more concerned (and you’d be a lot more embarrassed) about the latter.
Myth #2: Bankruptcy is some kind of scam
Far from it. Unlike many get-out-of-debt schemes by so-called credit counselors and nonprofits, bankruptcy is actually sanctioned by the U.S. Constitution. It’s your right as a U.S. citizen, and for good reason. In our current society, creditors often have the upper hand. They can call you day and night, repossess your assets, foreclose on your home and otherwise make your life a living hell. But when you file for Chapter 13, you are protected from creditors under law, so long as you keep up payments (which will thankfully be much lower once the new laws go into effect). Bankruptcy gives you peace and quiet from creditors—which will lead to peace of mind.
Myth #3: Bankruptcy is not the best solution
Bankruptcy is often the best choice, but it depends on your personal situation. If you’ve missed mortgage payments and are headed for foreclosure, then by all means, yes! Bankruptcy is the only certain way to stop the foreclosure process once it’s started. When a court has approved your “reorganization” plan, you will be protected from creditors until you finish paying off debts.
That said, if you’re not in dire straits yet, you do have some less drastic alternatives. Say you’re managing the mortgage bill just fine, but are concerned because you’re living paycheck to paycheck. It might just take a little brainstorming or budgeting to give your bank account some breathing room. For tips on finding more cash, building a budget and beating the recession, consider ordering our free Financial Toolkit.
Hopefully this clears up some confusion about bankruptcy. But there’s one question I haven’t answered yet: Is bankruptcy right for you? To find out, simply fill out our free debt evaluation. Our bankruptcy experts will analyze your finances and give you an honest opinion—no strings attached. Whatever path you take, we’ll make getting out of debt a reality.