We all have preconceived ideas about consumer bankruptcy, but the most common stereotype of bankruptcy doesn’t stir up a lot of sympathy for most of us. We picture a young, reckless American adult, privileged and unschooled in smart spending and saving, who has racked up credit card debt through frivolous living (picture: vacations, fancy cars, a mortgage they can't afford) who is suddenly reduced to eating Ramen noodles, pawning valuables, and asking friends to foot the bill at restaurants. We see their demise and think, well, that serves you right.
Only a handful of bankruptcies actually look like this. Surprised? Don’t be. The past decade has involved plenty of ups and downs in the U.S. economy, making Americans seasick as they struggle to get a hold of their finances in turbulent times. As a result, the face of bankruptcy has changed quite a bit. While it’s true that the stereotype of the “irresponsible spender” characterizes the bankruptcy field, let’s get one thing straight: more factors than irresponsible spending drive people to bankruptcy.
There are quite a few myths reinforced by years of media and movies into the American mind that simply are not true, especially now that bankruptcy is shifting in America.
Myth #1: Only irresponsible spenders file bankruptcy.
As I just pointed out, times are changing, and the economy has forced the hands of unlikely profiles to declare bankruptcy. Earlier this year I wrote a guest post for Gini Nelson, New Mexico bankruptcy attorney, which she published on her blog. I wrote about why “Bankrupt” doesn’t mean “Irresponsible” revealing the reality behind many bankruptcies. Nowadays, bankruptcy hits normal families with normal spending habits just as often as it hits the reckless spenders among us. For many people, filing bankruptcy is a desperate reach for a lifesaver at the mercy of expensive healthcare costs due to illness or injury, student debt, divorce proceedings, or just the rising costs of life: food, housing, education, etc. Job loss, too, plays a role in bankruptcy.
Myth #2: It’s nearly impossible to recover financially from bankruptcy.
Bankruptcy is our nation’s way of protecting the debtor and providing a route to financial freedom. It is the path to recovery! Of course, the way out is through sound and smart habits: using credit cards wisely, ensuring that your credit is being reported back to the credit bureau, saving, and paying bills on time. Even in a tough financial climate, it is possible to regain a footing and get out of the nightmare of debt. Part two of the above post I linked is one all about the “Middle Class Climbing out of Bankruptcy” and tells some inspiring stories about individuals (and families) who have done just that.
Myth #3: You can discharge your entire debt load through bankruptcy.
Certain types of debt cannot be discharged under the U.S. Bankruptcy Code. If you think about it, we’d all be declaring bankruptcy if we could get rid of all our debt so easily, and you can imagine how this federal protection would quickly become abused. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) prohibited student loans from being discharged through bankruptcy. Debts incurred through improper behavior are not discharged, such as through fraud, malicious injury to a person, personal injury to another person, or injury caused by the debtor’s operation of a motor vehicle while intoxicated. In addition, certain types of tax claims, debt for spousal or child support, debts to the government are not typically discharged. You can read more about it on the U.S. courts website.
Myth #4: Your credit is ruined forever if you file for bankruptcy.
A bankruptcy will stay on your credit report for anywhere from 7 to ten years, depending on whether you file Chapter 7 or Chapter 13 bankruptcy. But you can still take steps to build better credit and eventually have a high score again.
Myth #5: College-educated people with successful jobs rarely file bankruptcy.
The Institute for Financial Literacy reported in 2011 that “college education doesn’t appear to ward off bankruptcy as the rate of degree holders filing bankruptcy increased by 20%” in the five years prior to the report. In addition, during those five years, bankruptcy filers with incomes above $60,000 increased their rate of filing by over 66%.
If you feel shame at the thought of declaring bankruptcy, understand that the numbers are shifting. It’s normal to cringe at the thought of filing for bankruptcy, but the reality is that more and more educated, successful people have accepted this as the route to regain their footing when debt piles too high.