There are many myths associated with bankruptcy filing. These preconceived notions are often unfounded. Understanding the reasons and benefits for bankruptcy filing will help understand the idea behind bankruptcy and dispel the stigma.

Not all bankruptcies were created equal

The two major personal bankruptcy chapters are Chapter 7 and Chapter 13. In a Chapter 13 bankruptcy case, the debtor’s debt is redistributed over a longer time frame in a custom designed repayment plan. Debt is not forgiven but restructured based on the debtor’s future income. In a Chapter 7 bankruptcy, most unsecured debt such as credit cards and similar consumer debt is discharged. However, there are many debts like child support or student loans that will not be discharged. Debtors who see themselves forced to file for bankruptcy go through much distress, their credit rating is damaged for years to come and not all debt will be discharged. The cost of distress and long term poor credit rating makes bankruptcy not really a free ride.

Bankruptcy can happen to anyone

When debt grows over a debtor’s head, irresponsible spending is not necessarily the reason for having to file for bankruptcy. In many cases, unforeseeable events such as medical emergencies or job loss in a bad economy can all be grounds for filing bankruptcy. Even high earners can be inflicted with financial difficulties forcing them to file for bankruptcy. A business loan gone bad in a recession has little to do with one’s spending habit and may well become a reason to file for bankruptcy.

Bankruptcy is not the end of good credit

Although a bankruptcy filing will significantly lower your credit score and will stay in your credit report for ten years, it will also allow you to rebuild your credit. If you gain the upper hand of your financial responsibilities after a bankruptcy filing, you will have a chance to slowly build your credit again. Struggling with bills, late payments and overextending one’s credit will all result in a lower credit score anyway. So instead of trying to fight the inevitable, you will be better off in the long run with a bankruptcy in your credit report than with a series of late payments and other credit no-nos.

Bankruptcy will not leave you penniless

In a bankruptcy, your assets will be liquidated to pay off your creditors. The most valuable asset is most often the home. However, the home can only be a real asset if there is enough equity on it or has significant value above the mortgage amount owed. If you have taken out a large home equity loan or the value of your home has dropped so that you owe more than what the house is worth, nobody will have an interest in your home and you most likely get to keep it.

Bankruptcy is designed to help debtors get a second chance. Although the process can be heartbreaking and difficult, the main idea is that debtors can start with a clean slate and go on with their lives without descending into poverty.