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Five Common Personal Bankruptcy Myths

Filing for bankruptcy is a significant decision, and it is one not made easily made, considering prevalent misinformation on the issue. Clearing up five common myths about personal bankruptcy can help people better understand the process and its effects:

1. You Won't Qualify to File for Bankruptcy: Changes to federal bankruptcy laws in 2005 modified the eligibility requirements for personal bankruptcy. However, they did not eliminate bankruptcy as an option. Individuals must pass a means test to qualify for Chapter 7 bankruptcy, and if their income is too high, they may be able to file for Chapter 13 bankruptcy, which is available to people with steady sources of income.

2. You Will Lose Your Home and Vehicle: In Chapter 7 bankruptcy, an individual's assets are liquidated to satisfy his or her debts. But, certain assets such as your house or car may be exempt from liquidation. In Chapter 13 bankruptcy, individuals may keep significant assets while repaying their debts through a restructured debt repayment plan. In addition, filing for bankruptcy may stop foreclosure proceedings.

3. You Will Lose Your Retirement Accounts: Retirement assets like a 401(k) generally are exempt from liquidation in bankruptcy proceedings. However, if money is taken from a retirement account prior to filing for bankruptcy, the funds are no longer protected from distribution to creditors. Therefore, it is usually best not to use retirement funds to pay debts, especially when bankruptcy is a possibility.

4. You'll Never Get Credit Again: Filing for bankruptcy will lower your credit score. But after 10 years, bankruptcy is no longer on your credit report. If you emerge from bankruptcy with your debt discharged, credit card companies may be more likely to offer credit to you when you are debt-free rather than when you were mired in debt.

5. You Can Only File Once: While there are limitations on multiple bankruptcy filings, individuals can file for bankruptcy more than once. They key restrictions bar individuals from filing for bankruptcy a second time within a certain time frame, which ranges from two to eight years, in general.

Filing for bankruptcy may be a viable option for individuals overwhelmed with uncontrollable debt. If you are considering bankruptcy, get the facts by consulting with a knowledgeable bankruptcy lawyer.

Source: 5 Myths About Personal Bankruptcy

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