12 myths about bankruptcy

By Bankrate.com

Like most big, bad scary things, bankruptcy has a reputation based on a few tidbits of truth and lots of embellishment. It's not nearly as frightening once you know the truth.

With a mind toward de-clawing the monster, here are a dozen misconceptions about bankruptcy:

1. Everyone will know I've filed for bankruptcy.

2. All debts are wiped out in Chapter 7 bankruptcy.

3. I'll lose everything I have.

4. I'll never get credit again.

5. If you're married, both spouses have to file for bankruptcy.

6. It's really hard to file for bankruptcy.

7. Only deadbeats file for bankruptcy.

8. I don't want to include certain creditors in my filing because otherwise I can never pay them what I owe.

9. Filing for bankruptcy will improve my credit rating because all those debts will be gone.

10. You can't get rid of back taxes through bankruptcy.

11. You can file for bankruptcy only once.

12. I can max out all my credit cards, file for bankruptcy and never pay for the things I bought.

And here are the details:

1. Everyone will know I've filed for bankruptcy.

Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While it's true that bankruptcy is a public legal proceeding, the number of people filing is so massive that very few publications have the space, the manpower or the inclination to run all of them.

2. All debts are wiped out in Chapter 7 bankruptcy.

You wish. Certain types of debts cannot be discharged and erased. They include child support, alimony, government-issued or government-guaranteed student loans, and debts incurred as the result of fraud. It's also very unlikely that a judge will discharge legal settlements you've been assessed, such as money you've been ordered to pay to someone who sued you.

3. I'll lose everything I have.

This is the misconception that keeps people who really should file for bankruptcy from doing it, says Chris Viale, chief operating officer of nonprofit, Massachusetts-based Cambridge Credit Counseling Corp.

"They think the government will sell everything they have and they'll have to start over in a cardboard box," Viale says.

While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

"For most people, they'll pass through a bankruptcy case and keep everything they have," says John Hargrave, a bankruptcy trustee in New Jersey. If you have a mortgage or a car loan, you can keep those as long as you keep making the payments (like the rest of us).

Continued: You'll be able to get credit again

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