What is true and false about bankruptcy?

Understanding the facts about bankruptcy is important prior to deciding if it is the right option for a given situation.

In the past decade, our nation has experienced a high number of bankruptcy filings. This is due in large part to the recession and has changed many consumers' view on Chapter 7 and Chapter 13 bankruptcies. Despite this, there can still be Tennessee residents who feel hesitant about initiating a bankruptcy proceeding. This can be in part due to incorrect information that they believe to be true. For this reason, it is important that debtors know the facts about bankruptcy in order to get the help they deserve.

Common misunderstandings

Among the plethora of myths that abound concerning consumer bankruptcy, the following are among five of the most common:

  • Married persons must always file bankruptcy jointly.
  • Any type of debt can be discharged via a bankruptcy proceeding.
  • New mortgage loans will not be available to homeowners after they have filed for bankruptcy.
  • Homeowners will always lose their homes in Chapter 7 bankruptcies.
  • Debts included in a bankruptcy are stricken from all records and credit reports.

Like myths related to virtually any topic, these falsities are all rooted in some form of a truth. However, the actual truth about each one is quite different than the above comments.

Joint and sole filings

According to Bankrate.com, married persons can choose to file joint or sole bankruptcies. It is important, however, for potential filers to consider what debts are held in one person's name versus those in both spouses' names. Depending upon this, a joint bankruptcy may be more beneficial to some couples.

Different types of debt

While some consumers understandably wish that any type of debt can be discharged in a bankruptcy that is simply not true. The American Bankruptcy Institute makes it clear that items such as child support payments, spousal support payments and student loans will not be allowed in a bankruptcy proceeding. These debts will remain the responsibility of the consumer during and after a bankruptcy.

New mortgage options

Fears about the inability to ever own a home again can be put to rest as the New York Times notes that consumers who file for bankruptcy can successfully qualify for mortgages in the future. One thing that can facilitate this is offering clear information that shows how a person's current situation is different than that which led to the prior bankruptcy.

Potential loss of homes

A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. This is because assets can be seized and sold as a means of repaying debt and this can include homes. However, Forbes also identifies that debtors are allowed to retain some assets with values below certain levels. These are referred to as exemptions. Homes that have values below these levels may be retained even through a Chapter 7 bankruptcy.

Future records

Bankruptcy can provide a clean financial slate in terms of debt load but it does not eliminate all record of prior debts. Consumers should expect that credit reports will show all debts and those included in a bankruptcy will be noted as such.

Important tips for consumers

Knoxville residents who believe that bankruptcy can help them should always contact an experienced lawyer. The right attention to detail and the law is important when preparing a bankruptcy filing.

Keywords: bankruptcy, Chapter 7, Chapter 13