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Five of the Biggest Misunderstandings About Chapter 7 Bankruptcy

Posted by John Smith | Jan 05, 2021 | 0 Comments

If you're overwhelmed by your financial obligations, Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” might be your best debt relief option. But be sure to get your facts straight before going down this road: many misunderstandings, myths, and rumors circulate about this form of bankruptcy. These misconceptions can make some people choose–or avoid–bankruptcy for the wrong reasons.

Below are five of the most common misunderstandings about Chapter 7 bankruptcy–and the reality that you need to know.

Misunderstanding #1:  Bankruptcy discharges all of your debt

While Chapter 7 may eliminate most of your debt, it does not necessarily discharge all of it. You will almost always be responsible for secured debt, even after bankruptcy. Such debt includes certain federal, state, and local taxes, child support and alimony, student loans, debts of criminal fines, restitution, and claims arising from impaired driving.

Misunderstanding #2: Bankruptcy permanently ruins your credit

If you file for bankruptcy, your credit score will not be ruined for life. Yes, the bankruptcy will remain on your credit report for ten years after filing, but you can start rebuilding and improving your credit rating immediately. If you repay any remaining or new debt on time after filing, and keep your credit cards at 30 percent or less of the credit line extended to you, your credit score will begin to increase. You may be able to rebuild your credit –and even exceed your former credit score–within a year or two.

Misunderstanding #3: Bankruptcy causes you to lose all your property

Contrary to popular belief, you won't be left with only the clothes on your back if you file for bankruptcy. Although Chapter 7 means that the bankruptcy trustee will liquidate some of your assets to repay creditors, certain assets are exempt from liquidation under state and federal law. Arizona state law provides a very generous exemption for your primary home and vehicle, so you will usually be able to keep them. You are also likely to keep your clothes and other personal items that have little intrinsic value.

Misunderstanding #4: Bankruptcy filers are fiscally irresponsible

Many people feel ashamed of filing for bankruptcy because they see it as a personal failure or because they're afraid of being perceived as being financially reckless. But the vast majority of people file for bankruptcy because of divorce, exorbitant medical fees, job loss, or unforeseen emergencies, not because of wasteful spending. Even if you did make poor financial choices that led to bankruptcy, there's absolutely no reason to feel ashamed of trying to start afresh and learning to do better.

Misunderstanding #5: You'll lose your job if you file for bankruptcy

By law, your employer cannot fire, demote, or take any other kind of discriminatory action against you because you've filed for bankruptcy. In most cases, even though the bankruptcy is a matter of public record, they will not know that you've filed. Your job might be in jeopardy, however, if you're in a position of significant fiscal responsibility and the company learns that you're trying to discharge debt that you acquired through means that suggest poor judgment, such as gambling or addiction. In this case, it would not be the bankruptcy itself that threatens your job, but the actions that gave rise to the bankruptcy.

About the Author

John Smith

Law Offices of Gerald K. Smith and John C. Smith, PLLC, Tucson, Arizona Partner (Sept 2008 – Present)Smith & Smith focuses primarily on civil and commercial litigation, bankruptcy and corporate reorganization. 


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