Filing for bankruptcy is not a decision most people are eager to discuss. Bankruptcy usually enters the picture after someone has tried and failed to address mounting financial pressures, and now find that the available options to fix things are limited. However, filing for bankruptcy does not make someone a bad person. Unfortunate circumstances can happen to anyone, and a medical emergency or unexpected job loss can easily have catastrophic consequences on a person’s finances. Many families are functioning under strict budgets that leave little to no room for error, with 46% of Americans saying emergency expenses of $400 would be difficult to absorb, according to the Federal Reserve. This statistic leaves many vulnerable, and bankruptcy may be the best option to alleviate overwhelming financial obligations.

Because bankruptcy is shrouded in shame for many people, a lot of myths have grown up around how the process works and what the long- and short-term consequences of bankruptcy are. Understanding what bankruptcy can and cannot do, as well as its effects beyond the bankruptcy case itself, is important for anyone considering bankruptcy. A discussion of common misconceptions about bankruptcy will follow below.

Everything Will Be Taken

Most consumers file for Chapter 7 Bankruptcy, which is a liquidation process. The bankruptcy court will appoint a trustee to collect and sell a debtor’s assets, which are used to pay outstanding obligations to creditors. However, only certain assets are subject to bankruptcy liquidation, which means a trustee is not able to take everything a person owns in an effort to satisfy creditors. Exempted assets vary by state, and in Indiana, for example, individual debtors can exempt up $17,600 of equity in their home (which is doubled for married couples filing jointly), 75% of earned but unpaid wages (though a bankruptcy is likely to allow more for low-income debtors,) and $9,350 in other real estate or tangible personal property, such as a car. Any debts remaining after the trustee takes a debtor’s available assets, assuming there are any, would be discharged.

Note that not everyone qualifies for Chapter 7 bankruptcy. Each filer must pass the “means test,” which looks at a debtor’s income as compared to the median income in his or her state. If the debtor’s income is higher, he or she may not be permitted to file under Chapter 7, and would have to choose an alternative bankruptcy chapter for debt relief.

My Credit Rating Will Never Recover

There is no getting around the fact that a bankruptcy will have a negative effect on a debtor’s credit, typically staying on credit reports for seven to ten years, but if someone is at the point that bankruptcy is necessary, his or her credit rating is likely suffering already. In fact, bankruptcy usually stops a debtor’s credit score from dipping lower because the unpaid debts will no longer be part of the credit score calculation. After the bankruptcy is over, getting new credit is possible, though the terms may be more restrictive, and require the borrower to put down collateral or money to secure it. Some lenders actually seek out individuals who filed for bankruptcy to offer lines of credit, but caution should be used in case the terms are unreasonable.

Bankruptcy Only Affects the Person Filing

Finally, loan co-signors or spouses in divorce could assume that if the other party has associated debt discharged in bankruptcy, they are no longer responsible for it as well. This is not the case, and creditors can and will pursue co-signors and/or spouses for payment. This risk is part of the decision to co-sign a loan, and should be considered before agreeing. Divorcing spouses, on the other hand, can seek spousal maintenance (alimony) instead a property settlement, which is not dischargeable in bankruptcy to cover any outstanding debts they will have to pay.

Hire a Bankruptcy Attorney

Bankruptcy is an important tool that allows you to rebuild your financial health in times of crisis. Given how important this process in is the short-and long-term, the outcome should not be left to chance. Hire an experienced bankruptcy attorney so you know that your petition will be handled properly and efficiently. Attorney Christopher L. Arrington understands how overwhelming these situations are and is ready to help you start rebuilding your financial future. If you live in the Indianapolis area, contact the office today to schedule an appointment.