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Bankruptcy Myths and Truths

Updated on August 22, 2011


Bankruptcy Defined - A legal proceeding involving a person or business that is unable to repay any outstanding debts. The bankruptcy process begins with a petition filed by the person in debt or unable to pay (most common) or on behalf of lenders seeking payment (less common).

All of the assets are added up and evaluated, and then are added to repay a portion of outstanding debt. Once completed, the remaining debts are forgiven and offer a new, fresh start to the individual or business. There are 3 main types of bankruptcy filings: Chapter 7, Chapter 11, and Chapter 13. These are filed in the Federal Courts meaning that no state suits can be filed.

During this time while the economy is in recession and making a slow recovery, many families are turning to bankruptcy to help elevate the pressure. Some people are being hounded by creditors and lenders who require payments to be made.


MYTH - You have to pay the creditor or they will sue, you have no choice.

TRUTH - If you have a house, or car or any other financial assets, yes they can sue you. However, that doesn't mean they actually will. Many times credit card companies and bank will have a separate finance department and have an attorney on staff.

This attorney will send out documents to you stating that a suit has already been filed. THIS CAN BE FALSE! It's just a scare tactic to get you to pay money you don't have.

MYTH - You have to file bankruptcy to get the creditors off your back.

TRUTH - Do you rent? Lease a car? Do you have disability, VA or inheritance income? Do you live with family or stay with friends? You are judgement PROOF!

You don't have anything they can take. Companies can call, threaten, send you mail, show up at your house, but THEY CAN NOT take anything from you. So there is no reason to file for bankruptcy. When they call just tell them, "I don't have the money to pay you" and they will just have to deal with it.

*Update - Each state has variations of laws pertaining to what can be included or excluded in bankruptcy. The general federal laws are the same, but check with your states laws to be sure.

MYTH - A bankruptcy filing can stay on your credit report forever.

TRUTH - Bankruptcy only stays on your credit report for 10 years. The only reasons you would want to file, is if you OWN cars, boats, houses or other assets. Since the housing market has crashed, many people are underwater on their home. There is no equity for the lenders to get out of any legal suit.

MYTH - A judgement has already been filed against me, I have to file bankruptcy NOW!

TRUTH - Once you have been sued and the judgement against you is won, you could still have MANY YEARS until the judgement is executed! Spend your time trying to workout a settlement with the lenders, and try not to panic. It's not too late to fix the problem, you just need a well thought out plan.

More information here - US Bankruptcy Court

MTYH - The amount of debt forgiven is free and clear.

TRUTH - In the past the amount of debt forgiven didn't have any consequence personally. But now, with the recent IRS changes, some of the debt will be taxable as income to you. It depends if the debt was forgiven or cancelled.

In some cases you have to prove you were insolvent during the time the bankruptcy was filed, before the IRS will exempt you from paying taxes on it. If you aren't cleared of the debt, and are held responsible for the amount forgiven, you will receive a Form 1099C-Cancellation of Debt. This will need to be filed with your normal income tax return.

MYTH - You received a letter from the courts or attorney stating a suit has been filed. You have to take action now!

TRUTH - If you received a letter that "looks" like it's from a court or lawyer, just call and do some research. The court document number or suit number will be on the letter if it's real. You can just call the courthouse and verify the information. Many times the suits have not been filed and they are just bullying you and your family. SHAME ON THEM.

MYTH - I talked to my lawyer and he suggests I file for bankruptcy, so I have to do it.

TRUTH - Sometimes a lawyer will just see you as a dollar sign. Not everyone has your best interest at heart, so ask around and get several opinions. It might just save you and your families assets.

It is important to talk with a lawyer or bankruptcy attorney, and do some research before filing. Bankruptcy is a difficult and emotional process, and should be considered a last resort or last ditch effort.

In general student loans, child support and back taxes to the IRS are not bankrupt-able. It depends on the type of bankruptcy you are filing for and which state you live in.

I am not a bankruptcy attorney and am not writing this to direct those of you who really do need to file bankruptcy. I just want to shed some light on the subject, and hope you make the best informed decision for yourself. I have made a few clarifications and corrections to keep this hub updated.

More information on Bankruptcy Basics


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    • profile image


      7 years ago

      Most of my clients have an old car and a checking account they want to protect. So filing is a good idea. Finding a quality paralegal or attorney that are reasonably priced is the major issue. In California, contact me, but for other states, do your research and check out their reviews before hiring them. Just like a car repair shop, you have few good ones and many bad ones.

    • applecsmith profile imageAUTHOR

      Carrie Smith 

      7 years ago from Dallas, Texas

      Thank you for the comment. Sorry to hear you had a bad experience with filing bankruptcy, but it's good to know you can avoid it in the future.

    • Randy Horizon profile image

      Randy Hirneisen 

      7 years ago from Philadelphia

      Great hub. I filed a chapter 7 about 20 years ago, but my lawyer made a mistake and forgot to include my house. I couldn't believe it. When I asked him why he first tried to blame it on me, when that didn't work he had no answer. I had to file again as chapter 11 and also included him. The second time I had great lawyer. She actually cared about her clients. I would advise anyone to hire her except now she works for the DA.

    • applecsmith profile imageAUTHOR

      Carrie Smith 

      7 years ago from Dallas, Texas

      Yes, Brupie you are correct. Student loans are not bankruptable, and taxes for the most part aren't either. It's all tricky, thank you for the comment.

    • Brupie profile image


      7 years ago

      Thanks for the hub. Bankruptcy is something a lot of people don't know much about or understand.

      I didn't see anything about student loans. I know some people think they can just walk away from everything after filing, but some things, e.g. student loans are not forgiven at all and taxes can be tricky.

    • applecsmith profile imageAUTHOR

      Carrie Smith 

      7 years ago from Dallas, Texas

      So glad to hear this hub has helped. Thank you all for the comments!

    • rex michaels profile image

      rex michaels 

      7 years ago

      I am so glad I and many others have found you, the information you provide is spot on! thanks for sharing

    • profile image


      7 years ago

      Excellent Hub and one I was glad to read. Thought about filling for bankruptcy recently, but will do some more research on the subject. You have giving me lots to think about. Thanks

    • ripplemaker profile image

      Michelle Simtoco 

      7 years ago from Cebu, Philippines

      There is more to things that meets the eye. My friend who is a financial consultant said that one could negotiate with the bank if one knows how.

      Congrats on your Hubnuggets nomination! For voting and other details, head this way:

    • Simone Smith profile image

      Simone Haruko Smith 

      7 years ago from San Francisco

      Thanks for setting the record straight, applecsmith! I hope this helps people out :D

    • thebluestar profile image

      Annette Donaldson 

      7 years ago from Northern Ireland

      Very interesting hub. Certainly opened my eyes about the myths and mystery surrounding bankruptcy. I don't think some of the legislation applies in Ireland thou. Thank you for sharing


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