Unless you’ve already been through the process, you may not know much about bankruptcy. It can be a sensitive subject, and many believe that it is only reserved for financially swamped people. However, anyone can experience financial stress, and bankruptcy is a great way to overcome financial potholes. If you would like to learn more, check out these three myths.
1. Myth: Only Financial Failures File Bankruptcy
Overusing credit is only one reason people may file bankruptcy, and it’s not even the main reason people file. One common reason why people file bankruptcy is to get rid of medical bills that insurance didn’t cover. In fact, in 2019, 66.5 percent of US bankruptcies were due to medical bills or time off work for medical issues.
Job loss is another top reason for filing bankruptcy, and it is often connected with unpaid medical bills. If you lose your job, you may lose your insurance. Even if you decide to purchase COBRA (Consolidated Omnibus Budget Reconciliation Act) insurance, you still may be unable to pay coinsurance, co-pays, and other out-of-pocket expenses. Plus, without a job, you may fall behind on other bills, including your car loan and home loan.
Unexpected circumstances can also lead to bankruptcy. This is commonly a problem because many Americans don’t have much money in savings and must live paycheck to paycheck. One small, unexpected circumstance like the refrigerator breaking may not financially destroy you, but a lot of little problems or one big problem can add too much financial stress.
2. Myth: Bankruptcy Ruins Your Credit
If you’re considering bankruptcy, your credit may already be dropping. While bankruptcy does stand out on your credit report, so do many other factors, such as not paying bills, not paying bills on time, and not paying the full monthly bill. If you’ve had to do any of this because of financial stress, lenders may already see you as a risk.
This is especially problematic if you have a high debt-to-income ratio. This means you have too much debt compared to your income. When lenders see this, they are less likely to take a chance on you because they’ll assume you won’t have enough money to repay the loan.
Bankruptcy can actually help in the long run by eliminating some of the other debt with which you struggle. With less debt, you’ll be in a better position to pay remaining bills in full and on time. However, bankruptcy will appear on your credit report for 7 to 10 years, depending on whether you filed chapter 13 or chapter 7. Even while it’s on your credit report, however, the power of the bankruptcy diminishes as more time passes.
3. Myth: Bankruptcy Can Eliminate All Past Debt
Unfortunately, bankruptcy can’t eliminate all past debt, but it can eliminate some of the most problematic debt, such as medical bills, personal loans, and credit card loans. You can also file for bankruptcy on property or vehicles, but they will likely be reposed.
Some debt, however, cannot be discharged during bankruptcy. Typically, you can’t discharge debt that is related to government or court issues, such as taxes, government fees, criminal fines, child support, alimony, and some types of personal injury settlements.
Also, bankruptcy typically excludes student loans. This is unfortunate as many Americans struggle with school debt and may assume bankruptcy is an option. However, eliminating other debt may help you repay your school loan without financial devastation.
If you have to file bankruptcy, you aren’t a failure, and even though it will stay on your credit report for some time, it can actually improve your financial situation in the long run by giving you more money to pay off other bills or put into savings. If you would like to know more, contact us at Wiesner and Frackowiak, LC, today.