If you’ve ever considered filing for bankruptcy, chances are you’ve probably heard a few things that simply aren’t true. Myths about bankruptcy can lead to false expectations or keep people who would otherwise benefit from bankruptcy from filing altogether.
Some of the most common bankruptcy myths include:
Only irresponsible people file for bankruptcy.
Bankruptcy sometimes carries the stigma that only people who are irresponsible with their finances declare bankruptcy. While It’s true that some bankruptcies are the result of mismanaged credit or living outside of one’s means, most people who file are honest, hard workers who are struggling to get back on track following a catastrophe or difficult circumstances. In fact, the top causes of bankruptcy in Canada are job loss, divorce, and medical problems.
Bankruptcy is a quick fix to get rid of all debts.
The bankruptcy process should not be considered an easy way out of debt. A first-time bankruptcy typically lasts nine months. During this time, the debtor must adjust to living on a fixed income without the use of credit.
Those who are employed may also need to make surplus income payments to their trustee, which is used to help repay debts.
Not only that, but bankruptcy does not eliminate all debts. If you file for bankruptcy, you may still be responsible for secured debts (like your home and car, as well as child support, alimony or other court ordered payments, and student loans that are less than 7 years old.
People who file bankruptcy lose everything.
Many people worry about losing everything they own when they file for bankruptcy. This is not the case. There are many assets you are allowed to keep, including some furnishings, clothing, pets, and more. These items are called exemptions. Each province has its own list of assets (and their respective value limits) that are exempt from seizure during a bankruptcy. Depending on the amount of equity you have, you may still even be able to keep your home or vehicle.
Everyone will know if you file bankruptcy.
It’s true that bankruptcy records are public record. However, it is highly unlikely anyone will find out about your bankruptcy unless you choose to tell them. Typically, the only ones who find out you’ve filed bankruptcy are your creditors and anyone who pulls your credit report once the bankruptcy is discharged.
Credit is damaged beyond repair after bankruptcy.
Damage to credit is one of the biggest concerns people have about bankruptcy. However, a bankruptcy is no longer listed on your credit report after seven years. After that, it’s as if it never happened. You may be charged a higher interest rate at first, but you can obtain credit while the bankruptcy is still on your credit rating.
Bankruptcy will ruin my credit and my spouse’s.
Sometimes, only one spouse will file bankruptcy. When this is the case, bankruptcies are only reported on the credit of the person who declares bankruptcy. However, if you have joint accounts, the spouse who does not file bankruptcy will still be responsible for the debts. Additionally, they are not protected from creditors.
If you have questions, a consultation with a licensed insolvency trustee can help you separate myths about bankruptcy from facts.