What Is Bankruptcy
Most people know that bankruptcy involves debts and finances, but many people are unsure about the details. Bankruptcy is a legal proceeding designed to help individuals and businesses deal with severe debt and other serious financial problems. Typically, people will turn to bankruptcy when they cannot resolve their financial issues on their own.
All bankruptcy cases are handled in federal bankruptcy courts. The United States Bankruptcy Court for the Southern District of Iowa is where cases are handled for people living in the Des Moines area. There are several different types of bankruptcy, each with their own eligibility requirements. If you plan to file for bankruptcy, you should work with a skilled lawyer to determine what kind of bankruptcy filing is appropriate for you.
The most common types of bankruptcy filings include:
- Chapter 7 – available to individuals
- Chapter 13 – available to individuals
- Chapter 11 – available for businesses
Due to the complicated nature of bankruptcy proceedings, there are many misconceptions about bankruptcy. Keep reading as we dispel three common bankruptcy myths.
Misconception #1: When You File for Bankruptcy, All Your Debts are Discharged
Some people erroneously assumed that if you file for bankruptcy, all your debts will be forgiven, and you will not have to pay back your creditors. This myth arises out of a misunderstanding of what bankruptcy is and how it works. While bankruptcy offers debt release, this does not mean that all your debts are automatically discharged.
Debts that cannot be discharged through bankruptcy include:
- Court-ordered spousal support or alimony
- Court-ordered child support
- Court fines and penalties
- Government fines and penalties
- Most student loan debt
- Reaffirmed debt
When an individual files for Chapter 7 bankruptcy, before any debt is discharged, the individual surrenders all non-exempt property to pay back as much of their debt as possible before it is discharged. Similarly, when filing for Chapter 13 bankruptcy, debt payments are restructured, and only part of your debt is discharged.
Misconception #2: There Are No Consequences to Filing for Bankruptcy
Bankruptcy is not a "get out of jail free" card. Depending on the type of bankruptcy you file for, you may lose some of your property and assets. As mentioned above, when filing Chapter 7 bankruptcy, all non-exempt property is surrendered and sold as a means to pay back your creditors. Items that may be sold can include real estate, cars, boats, and other assets.
Bankruptcy can also negatively affect your credit score. Because bankruptcy is seen as "negative information," it can impact your ability to apply for loans in the future. It may also cause future creditors to charge you higher interest rates or to decline to give you credit at all. Chapter 7 can remain on your credit report for ten years, while Chapter 13 may stay for seven years.
While filing for bankruptcy may be a good option for you, before filing, you should consult with a lawyer to determine if this is truly the best option for you. Your attorney can help you understand the full consequences of filing for bankruptcy and help you make an informed decision.
Misconception #3: There Are No Alternatives to Bankruptcy
Struggling with insurmountable debt can feel like drowning. If you're not making enough to make your debt payments, you may feel like you have no options. This is often when people turn to bankruptcy. However, there are other options you can explore before filing for bankruptcy. Because of its serious consequences, bankruptcy should be considered your last resort.
Alternatives to bankruptcy include:
- Negotiating with creditors
- Debt consolidation
- Credit counseling w/a government-approved agency
These alternatives have the potential to reduce your monthly payments or restructure your debt so that it is more manageable for you. If possible, this is preferable to filing for bankruptcy.
If you are struggling with debt and considering bankruptcy, reach out to our law firm for guidance. Our lawyers offer compassionate legal counsel, and we are prepared to help you today.