Five Bankruptcy Misunderstandings

Bankruptcy arouses love, hate, and confusion among the general public.

As misunderstood as '80s rocker Boy George, bankruptcy inspires colorful commentary from its proponents and critics. If you're in a money crunch, and debt consolidation is out of the picture, you can't make an informed bankruptcy decision until you sort the conjecture from the facts. The following list of the top bankruptcy misunderstandings will help.

1. I'll become debt-free

In a Chapter 7 bankruptcy, the court may wipe away some of your debts, but not all of them. If you owe back taxes, child support, alimony, claims arising from a drunk driving incident, or debts related to fraudulent activities, you'll still owe these amounts after your case has concluded. If you have debt that's secured by your home or car, you don't get to keep either asset unless you make arrangements to pay for them.

2. Bankruptcy labels me as a loser

People have their judgments about bankruptcy filers, and there isn't much you can do about that. But the chances of anyone uncovering your bankruptcy details and using them against you are minimal-unless you're a famous personality. It's estimated that in the U.S., more than 1.5 million people file for bankruptcy every year. That number may include some 'losers,' but it also includes people like you who've legitimately hit hard times.

3. Bankruptcy destroys (or improves) my FICO

You've probably heard conflicting messages about how a bankruptcy affects your credit report. The truth is, bankruptcy has a strongly negative impact on your FICO score. And that negative impact hangs around for about 10 years. Even so, this doesn't bar you from borrowing money; you can probably obtain a secured credit card right after your bankruptcy closes. If you can establish two years' of on-time payments after the bankruptcy, your credit options will start to open up once again.

4. I should purchase things I need on credit before my filing

Be careful here. Luxury goods valued at more than $500 purchased within 90 days of your filing, and cash advances taken within 70 days, fall into the category of non-dischargeable debt. What's worse, you'll have raised some eyebrows in the bankruptcy court. If your purchasing history indicates that you bought things knowing that you were going to file, you might be labeled a fraud. Then your troubles will just be getting started.

5. Bankruptcy is easy (or hard)

Filing bankruptcy isn't exactly hard, but it is tedious. You'll have to provide a complete listing of all creditors, as well as a thorough documentation of your financial situation. Because of the complexity of the process and the negative impact it has on your credit report, you shouldn't jump into bankruptcy without considering all other options, including debt consolidation and credit counseling.

Bankruptcy is a touchy subject, and one that will always be misunderstood-just like Boy George. Don't worry about everyone else's perspective, though; make a well-thought-out decision based on what's right for you.