Bankruptcy Types, Consequences & Myths

Bankruptcy file.If you have explored all the other options available for dealing with debt, including professional help, bankruptcy is there. Previously a taboo subject, bankruptcy has seen a rise in recent years. And to some, it does not carry the stigma it once did.

However, considering it and going through with it as a debt reduction strategy affects your financial life for seven to 10 years. It is not something to take lightly. Individuals are eligible to file for bankruptcy under Chapter 7, 11, 12, or 13, so let’s take a closer look at each option.

Common Types of Bankruptcy Filings

– Chapter 7 Bankruptcy

Under this form of bankruptcy, individuals or businesses forfeit nonexempt assets to repay debts to the fullest amount and walk away from the rest. To qualify, individuals must take a ‘means test’ to determine if they make less than the state’s mean income.

– Chapter 11 Bankruptcy

Also known as reorganization, this type of bankruptcy is for individuals and more commonly, businesses to restructure debt. Here the debtor maintains ownership of assets and attempts to work out a plan to pay back creditors. It is the most complicated form and usually reserved for businesses or very wealthy individuals. The reorganization and payment plan are due in under 120 days, as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.

– Chapter 12 Bankruptcy

Unusually reserved for farm owners and fishermen, the debtor still owns assets and works out a repayment plan. It works very much like Chapter 13, but usually stretches out over three years.

– Chapter 13 Bankruptcy

Much like Chapter 11, but for individuals with personal debt. The debtor remains in control of assets, but repayments are repaid in planned structure.

7 Myths on Bankruptcy

1. Everyone will know I’ve filed for bankruptcy – unless a person is a well-known celebrity or corporation, there is little chance of people finding out, outside of their creditors. Although the filings are made public, with a large number of filings happening it is unlikely people will find out without doing an extensive background search on you.

2. All debts are wiped out under Chapter 7 bankruptcy – some debts are not discharged or erased. Child support and student loans, for example, will remain afterward, so it does not completely wipe the slate clean.

3. I’ll lose everything if I file for bankruptcy – every state has exemptions from judgment, including housing, cars, and household possessions. That means you can keep some of the essential items you need, as long as you show you will be able to afford them after discharge.

4. I’ll never be able to borrow again following bankruptcy – often it will be the contrary. You will usually start receiving many offers right after filing for bankruptcy, particularly from sub-prime lenders offering credit at high interest rates.

5. Bankruptcy is too difficult to file – actually, it’s not even necessary to have an attorney. If you can fill out the paperwork, you can go at it alone if you want to. However, it is highly recommended to obtain professional help throughout this legal process.

6. Filing bankruptcy will help my credit score, as the debts are removed – very incorrect. On a credit report, bankruptcy is about as bad as it gets. It can remain on a report for up to 10 years. However, in some cases, your credit score may go up shortly afterward depending on how badly you let things get out of hand before you filed. Either way, having it on your record will be worse overall.

7. You can only file for bankruptcy once – Chapter 7 is once every eight years. Chapter 13 you can file more often. Of course, it is extremely bad for your future credit score if you have multiple bankruptcies.

Consequences of Bankruptcy

Credit – after bankruptcy it should come as no surprise that both your credit score and report will be severely affected. It will linger on a credit report for seven to 10 years, regardless of your situation. Getting credit cards or loans will be more difficult than before, especially at a reasonable rate.

Employment – most employers today run not only a background check but also a credit report on potential employees. With the weak job market and employers being able to be more selective than ever, bankruptcy can be a reason against hiring you for the job. This is especially true in careers that involve handling money or those that fall within the category of finance or banking.

Emotional – many times people feel a strong sense of guilt after bankruptcy. Although the stress of creditors calling has ceased, the stigma remains. This negative thinking, however, will not help. Remind yourself that you are not alone, with over 2 million Americans filing in previous years.

Housing – even renting an apartment or home can become a challenge. As most places require a credit report for the rental application, approval is difficult with bankruptcy on the record. An additional deposit or co-signer will most likely be needed.

Managing Your Finances After Bankruptcy

  • Make a budget – As basic as it sounds, keeping and maintaining a budget is essential. If you need help, there are many services that can lend a hand in creating and maintaining a budget so you can live within your means.
  • Use cash – Learn to use cash more, and plastic less. It is easy to fall back into the same harmful habits; however, learning the old phrase “cash is king” is an important step after bankruptcy.
  • Pay on-time – Pay everything on time. Even power and phone companies will report late payments. It is crucial to keep your credit record clean if you are to rebuild your credit over time.
  • Watch your credit report – with the new clean slate you are given, it is important to keep an eye for any mistakes. Monitoring your credit is a necessary step after bankruptcy.
  • Get a new credit card – A secured credit card can be a great step in the right direction after bankruptcy. Here you deposit a set amount of money in an account, and this becomes your credit limit. By charging small amounts each month, and repaying on time, you begin to rebuild solid credit history.
  • Watch for scams – There are many offers out there to take advantage of people in their fragile state after bankruptcy. Watch out for any companies offering to fix everything, especially if they require a large upfront fee. There is no quick way out, and anything that sounds too good to be true most likely is.

Be sure to consider each of these points before filing for bankruptcy to get out of debt.

Borrow up to $50,000 with low fixed rates!

Posted on February 19, 2021 by in Debt Management

Comments & Discussion



2 Responses to “Bankruptcy Types, Consequences & Myths”


  • On July 25, 2012, Wes wrote:

    Hi Alini,
    Thanks for sharing your comments. We definitely recommend speaking to an attorney before filing. Many attorneys will offer a free consultation to better help you understand your options, the consequences and costs.

  • On July 24, 2012, Alini Bagattoli wrote:

    Talk to a credit specialist in your area before filing, and talk to your creditors before/after the problem persists. I wouldn’t pursue bankruptcy without seeking legal advice to further educate yourself about the laws that pertain to your state/area. It may not be as helpful as you’re hoping! Taking it out of context, you have a bumpy road ahead, but all you need to do is take one step after another and learn from your mistake. I also recommend establishing a debt-free management of your future. Trust me the pasture is greener. It’s tough being a student also, but been there done that, keep your head up, and don’t fail to learn from mistakes!




  • Advertising Disclosure Some financial products mentioned on this site are from companies that are partners with APRfinder. If you sign-up for a product or service through a link published on this site we may receive financial compensation for it.
  • National Debt Relief Rated #1 by Consumer Affairs for Debt Consolidation - Get a Free Quote.