Several years ago, bankruptcy reform intended to deter those who abused the system to get out of paying off debt made the laws a bit murky for many people. Since then, it has been somewhat difficult to separate bankruptcy fact from myth. We’ve pulled together a few facts for clarification.
Myths of Bankruptcy
The first bankruptcy myth that a lot of people believe is that bankruptcy will wipe your credit report clean. The truth about this one is yes…and no. Yes, a chapter 7 bankruptcy, once discharged, will eliminate debt. However, it will not wipe the credit slate clean. A bankruptcy will remain on your credit report for 7-10 years and, while debts discharged under the bankruptcy may no longer be held against a consumer, the bankruptcy can be. The intention of a bankruptcy is to give consumers time to rebuild themselves financially, and many do take the opportunity to do so. However, filing is not like waiving a magic wand at one’s credit and making all of the blemishes disappear.
Another myth is that those who file for bankruptcy will lose their house and/or car. Not strictly speaking. In fact, chapters 11 and 13 bankruptcies are sort of reorganization plans in which debtors don’t claim that they’re unable to pay their debt. Rather, they claim that they cannot pay it under the current terms, so the court as a mediator between debtors and creditors devise a payment plan that will make it possible for one to pay off one’s debt. In such circumstances, it’s possible to keep one’s house and/or automobile as long as one continues to make payments in accordance with the court’s order.
Child support and student loans can be included in a bankruptcy is a third myth that many people believe. No, they can’t. Both of these debts, regardless of financial circumstances, must be repaid. It’s possible, however, to work with Sallie Mae and the court system to arrange alternative payment options that lower payments and make them more manageable. In the case of student loans, it’s also possible, in some circumstances, to temporarily suspend student loan payments.