In this article, we will explore and debunk five common myths about bankruptcy. Bankruptcy is a legal process that can help individuals or businesses eliminate or repay their debts under the protection of the court.
Many people avoid filing for bankruptcy due to the stigma and misconceptions surrounding the process.
Myths about bankruptcy can prevent people from seeking the help they need. One of the most pervasive myths is that bankruptcy ruins your credit forever.
While it is true that bankruptcy will negatively impact your credit score initially, it is not a permanent mark on your credit report. In fact, filing for bankruptcy can help you rebuild your credit over time by eliminating your debt and allowing you to make timely payments on remaining debts.
Another common myth about bankruptcy is that it is only for irresponsible people who have mismanaged their finances. This is simply not true. Anyone can find themselves in financial trouble due to circumstances beyond their control, such as medical emergencies or job loss.
Filing for bankruptcy can be a responsible decision that allows individuals and businesses to regain control of their finances and start fresh. It is important to debunk this myth to reduce the stigma surrounding bankruptcy and encourage people to seek the help they need.
Common myths about bankruptcy
There are a number of common myths about bankruptcy, we look at the most common ones:
Myth 1: Bankruptcy ruins your credit forever
The myth that bankruptcy ruins your credit forever is a persistent misconception that can deter people from seeking help when they need it. In reality, bankruptcy can actually help improve your credit over time. Filing for bankruptcy eliminates your debts, which can help you achieve a better debt-to-income ratio and make you a more attractive candidate for credit. Additionally, bankruptcy can help prevent future delinquencies and defaults by allowing you to make timely payments on remaining debts.
According to a study by Business Insolvency Helpline, people who file for bankruptcy see their credit scores begin to recover within a year of filing. In fact, after five years, the credit scores of those who filed for bankruptcy are no different than the scores of those who did not. This highlights the potential for bankruptcy to be a positive step towards a better financial future.
To rebuild your credit after bankruptcy, it is important to be proactive and make timely payments on remaining debts. Consider opening a secured credit card or becoming an authorised user on someone else’s card to begin rebuilding your credit history. Avoid taking on new debts that you can’t handle and create a budget to help you manage your finances. By taking these steps, you can start rebuilding your credit and taking control of your financial future.
Myth 2: Bankruptcy is only for irresponsible people
The myth that bankruptcy is only for irresponsible people who have mismanaged their finances is not only untrue, but also unfair to those who find themselves in financial trouble due to circumstances beyond their control. In the UK, unexpected events such as illness, job loss, or divorce can have a significant impact on an individual’s finances, and bankruptcy can be a responsible decision to get back on track. It is important to debunk this myth to reduce the stigma surrounding bankruptcy and encourage people to seek the help they need.
There are many examples of people who have filed for bankruptcy despite being responsible with their finances. For instance, someone who was involved in a car accident and faced overwhelming medical bills may have had no other option but to file for bankruptcy. Similarly, a business owner who suffered a loss due to a natural disaster or a global pandemic may have had to file for bankruptcy to protect their business and start fresh. These examples show that anyone can find themselves in financial trouble and that filing for bankruptcy can be a responsible decision in some cases.
Unfortunately, the stigma surrounding bankruptcy can prevent people from seeking help when they need it. Many people feel ashamed or embarrassed to admit that they are struggling with debt, and fear being judged by others. This can lead to feelings of isolation and hopelessness, which can make the financial situation worse. It is important to break down these barriers and encourage people to seek help when they need it.
Myth 3: You’ll lose everything if you file for bankruptcy
In the UK, bankruptcy is a legal process that can help individuals and businesses eliminate or repay their debts. There are two types of personal bankruptcy: bankruptcy or IVA. Both options have different impacts on your assets, and it’s important to understand how they work before making a decision.
In bankruptcy, your assets may be sold to pay off your debts. However, there are certain assets that are exempt from bankruptcy. These assets are known as protected assets and include essential household items, tools of trade, and vehicles worth less than £1,000. Retirement accounts, pensions, and some insurance policies are also typically protected from bankruptcy.
In an IVA, you make an agreement with your creditors to pay off your debts over a set period of time, usually five years. Your assets are not sold, but you may have to release equity from your home to pay off your debts. Again, certain assets are protected from an IVA, such as essential household items and tools of trade. Retirement accounts and pensions are also typically protected.
One of the biggest fears people have when considering bankruptcy is losing their home or car. However, bankruptcy can actually help protect those assets. If you are able to continue making payments on your mortgage or car loan, you may be able to keep your home or car. Working with an insolvency practitioner or official receiver can help you explore your options and protect your assets. You may be able to refinance your home or car at a later date, once you have regained control of your finances.
Myth 4: Bankruptcy is a quick fix
While bankruptcy can be a helpful tool for managing overwhelming debt, it is important to understand its limitations. Bankruptcy cannot solve all financial problems, and it is not a magic solution that will erase all debt. Some types of debt, such as student loans and certain taxes, are not eligible for discharge in bankruptcy. Additionally, bankruptcy can have a negative impact on your credit score, which can make it more difficult to obtain credit in the future.
To avoid future financial difficulties, it is important to make changes to your budget and lifestyle. Creating a budget can help you track your expenses and identify areas where you can cut back. You may need to make difficult choices, such as downsizing your home or car, or finding ways to reduce your monthly bills. It is also important to build an emergency fund so that you have a financial cushion in case of unexpected expenses or income loss.
If you need help managing your finances or creating a budget, there are many resources available. The Money Advice Service offers free financial education and counseling to individuals and families in the UK. The National Debtline also provides free, confidential advice and support to those struggling with debt.
Additionally, there are many online tools and apps available to help you track your expenses and budget effectively. By taking control of your finances and seeking out resources for support, you can avoid future financial difficulties and work towards a more stable financial future.
Myth 5: Bankruptcy is too expensive
Filing for bankruptcy can come with significant costs, and it is important to understand these costs before making a decision. The costs associated with bankruptcy can vary depending on the type of bankruptcy and the complexity of the case. For example, the court filing fee for bankruptcy in the UK is currently £680 for bankruptcy and £90 for an IVA. However, additional costs may include the fees charged by a licensed insolvency practitioner, trustee fees, and costs associated with credit counseling and debtor education.
For those who cannot afford the costs upfront, fee waivers and payment plans may be available. Fee waivers may be available for those who meet certain income requirements, and payment plans may allow you to pay off the costs over time. It is important to explore these options and speak with a licensed insolvency practitioner to determine the best course of action.
Hiring a licensed insolvency practitioner is essential for ensuring a successful outcome in your case. Insolvency practitioners are licensed professionals who specialize in helping individuals and businesses navigate insolvency and bankruptcy. They can provide valuable guidance on which type of bankruptcy is right for your situation, and can help you understand the potential impact on your assets and credit score.
An insolvency practitioner can also help you with the filing process, negotiate with your creditors, and provide ongoing support throughout the bankruptcy process. While hiring an insolvency practitioner can come with additional costs, the benefits of having professional guidance and representation can far outweigh the costs in the long run.
In conclusion, bankruptcy is often misunderstood and surrounded by myths that prevent people from seeking the help they need. By debunking the five most common myths about bankruptcy, we hope to encourage readers to seek help if they are struggling with debt. Remember that bankruptcy is not a magic solution to all financial problems, but it can provide a fresh start for those who need it.
If you are struggling with debt, don’t let misconceptions about bankruptcy prevent you from getting the help you need. Seek the advice of a licensed insolvency practitioner or solicitor to determine the best course of action for your situation. Additionally, consider attending a financial education workshop or seeking credit counseling to learn how to budget and make lifestyle changes to avoid future financial difficulties.
Remember, seeking help for financial difficulties is not a sign of weakness, but a proactive step towards a brighter financial future. Don’t hesitate to take the first step towards financial freedom today.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.