12 Personal Bankruptcy Myths Everyone Gets Wrong

Bankruptcy can be a scary experience. But there are also some misconceptions about the process that can make it seem worse than it really is.

These myths often create unnecessary fear and shame, preventing individuals from considering bankruptcy as a legitimate way to get out of debt and escape other financial woes.

It’s time to debunk the following 12 common myths about personal bankruptcy so you can feel more comfortable seeking the financial relief you need.

1. Filing for bankruptcy is a sign of weakness

THE TRUTH : Seeking help is a sign of strength.

Some might be reluctant to file for bankruptcy because they see it as a sign of weakness. In reality, recognizing when you need help and taking steps to address financial difficulties is a responsible and proactive decision.

Many people face unexpected hardships — such as medical bills or a job loss — that can lead to bankruptcy. Taking action to resolve financial problems shows resilience and foresight. The faster you tackle the problem, the sooner you will get back on track so you can start building your net worth again.

2. Filing for bankruptcy means you are a failure

THE TRUTH : Bankruptcy is a tool for financial recovery.

There is a stigma associated with filing for bankruptcy that causes some people to view it as a personal failure. However, bankruptcy is simply a legal tool designed to help individuals recover from financial distress and start fresh.

Many successful people, including business owners and celebrities, have used bankruptcy to rebuild their lives. It's a step toward regaining control and paving the way for future financial stability.

3. Bankruptcy ruins your credit forever

THE TRUTH : Your credit likely will recover.

Although many people think bankruptcy permanently destroys your credit, it isn’t so. Bankruptcy does negatively impact your credit score initially, but many people find that their credit begins to recover within a few years if they manage their finances responsibly post-bankruptcy.

Rebuilding credit through consistent, on-time payments and responsible credit use can lead to significant improvement in your credit score.

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4. You will lose everything you own if you file for bankruptcy

THE TRUTH : Many assets are protected in bankruptcy.

A common fear is that filing for bankruptcy means losing all your possessions. However, in many states, bankruptcy laws allow for exemptions that protect essential assets such as your home, car, and personal belongings.

The goal of bankruptcy is to provide relief, not to strip you of everything.

5. Only individuals can file for bankruptcy

THE TRUTH : Businesses can also file for bankruptcy.

Some believe that only individuals can file for bankruptcy, but businesses can also seek relief through bankruptcy.

Different chapters of bankruptcy apply to businesses and individuals. But each type of bankruptcy is intended to help a person or business restructure or eliminate debt and move toward financial recovery.

6. Filing for bankruptcy means you are irresponsible with money

THE TRUTH : Financial hardship can happen to anyone.

There is a misconception that people who file for bankruptcy are irresponsible with money. However, many individuals who file for bankruptcy do so because of unforeseen and money-draining circumstances.

Medical emergencies, divorce, and economic downturns can all lead to bankruptcy.

7. You will lose your retirement savings if you file for bankruptcy

THE TRUTH : Retirement accounts are generally protected.

Many people worry that filing for bankruptcy will jeopardize their retirement savings. However, retirement accounts, such as 401(k)s and IRAs, often are protected under state bankruptcy laws.

These laws are intended to help you preserve future financial security so you can still look forward to a stable retirement.

8. Filing for bankruptcy will ruin your reputation

THE TRUTH : Bankruptcy is more common — and less stigmatized — than you think.

There is a widespread fear that filing for bankruptcy will permanently tarnish your reputation. In reality, it’s unlikely that many people outside of your creditors will know that you filed for bankruptcy.

Bankruptcy is a common and legal way to address overwhelming debt. Many people in society view it pragmatically rather than judgmentally. Sharing your experience can offer support and understanding to others who are struggling with their finances.

9. Filing for bankruptcy won’t stop creditors from harassing you

THE TRUTH : An “automatic stay” stops most collection efforts.

Some fear that creditors will continue to harass them even after they file for bankruptcy. The truth is that the bankruptcy court will initiate an automatic stay, which halts most collection activities and provides relief from creditor harassment for you and your family.

This legal protection gives you the breathing room needed to reorganize your finances.

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10. Filing for bankruptcy could cost you a job

THE TRUTH : Job loss due to bankruptcy is illegal.

Some people fear that filing for bankruptcy will result in job loss that will stop them from moving beyond living paycheck to paycheck . However, it’s illegal for employers to fire employees solely because they have filed for bankruptcy.

That doesn’t mean it cannot happen, even though it’s legally prohibited. But if you are illegally fired, you have the right to fight back.

11. You can file for bankruptcy only if you are unemployed

THE TRUTH : Employment status does not determine bankruptcy eligibility.

A common myth is that only unemployed individuals can file for bankruptcy. In reality, people from all walks of life can file for bankruptcy if they meet the legal criteria, regardless of their employment status.

12. Both spouses must file bankruptcy together if you are married

THE TRUTH : Individual bankruptcy filings are possible.

A common misconception is that married couples must file for bankruptcy together. In reality, one spouse can file individually if the debt is in just one person’s name.

Filing individually might be beneficial, depending on where you stand financially . The option to file for bankruptcy individually helps couples file in a way that suits their own unique needs.

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Bottom line

Understanding the realities of bankruptcy can help you make informed decisions about your financial future.

Dispelling the myths on this list can remove the stigma and fear associated with bankruptcy, allowing you to take the necessary steps to eliminate some money stress and move toward recovery.

Consider the facts about bankruptcy and determine if it might be the right option for your situation.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).