Common Bankruptcy Myths You Should Stop Believing

Bankruptcy is often misunderstood and misrepresented. For many people, just hearing the word “bankruptcy” brings fear, shame, and confusion. Unfortunately, this reaction is often based on myths rather than facts. In reality, bankruptcy is a legal tool designed to help individuals and businesses overcome unmanageable debt and regain financial stability.

If you're struggling financially or simply want to better understand how bankruptcy works, it's crucial to separate fact from fiction. In this article, we’ll debunk the most common bankruptcy myths you should stop believing—so you can make more informed financial decisions.

Filing for Bankruptcy Means You’ve Failed in Life

Truth: Bankruptcy is not a moral failure. It's a legal and financial strategy.

Many people equate bankruptcy with personal failure. This belief is often fueled by societal stigma and media portrayals. However, filing for bankruptcy doesn’t mean you’re irresponsible or incapable. It simply means your debts have exceeded your ability to pay due to circumstances that may be beyond your control—such as medical emergencies, job loss, divorce, or economic downturns.

Even high-profile entrepreneurs and celebrities have filed for bankruptcy and bounced back. Think of it as hitting the reset button to regain control over your financial future.

You’ll Lose Everything You Own

Truth: Bankruptcy laws often allow you to keep essential property.

One of the biggest fears people have is that bankruptcy means losing their house, car, or personal belongings. While it's true that some assets may be sold to pay creditors, there are exemptions that allow you to keep necessities. These vary by state and depend on whether you file Chapter 7 or Chapter 13 bankruptcy.

For instance, in many cases, you can keep:

• Your primary residence (up to a certain equity limit)

• Your car

• Retirement accounts

• Household goods and personal items

Speak with a bankruptcy attorney to understand what you can keep in your specific situation.

Bankruptcy Permanently Ruins Your Credit

Truth: Bankruptcy impacts your credit, but it's not forever.

Bankruptcy will appear on your credit report—Chapter 7 remains for 10 years, and Chapter 13 for 7 years. However, this doesn’t mean you’ll never be able to borrow money again. Many people start rebuilding their credit soon after their case is discharged.

In fact, some filers see an improvement in their credit score within a year because their debt-to-income ratio improves and collection activity ceases. Tools like secured credit cards, responsible budgeting, and on-time payments can speed up the recovery process.

You Can Only File for Bankruptcy Once

Truth: You can file more than once, though there are time limits.

Some people think bankruptcy is a one-time-only option. The truth is, while you can't file repeatedly back-to-back, the law does allow multiple filings under certain conditions. The time limits between filings depend on the type of bankruptcy:

• Chapter 7 after Chapter 7: 8 years

• Chapter 13 after Chapter 7: 4 years

• Chapter 13 after Chapter 13: 2 years

• Chapter 7 after Chapter 13: 6 years

Repeat filings are less common but sometimes necessary if a person experiences recurring financial hardship.

Everyone Will Know You Filed for Bankruptcy

Truth: Unless you're a public figure, your bankruptcy is not common knowledge.

Bankruptcy is a public record, but that doesn't mean it’s broadcast to everyone. While your filing is technically accessible through the court system, most people won’t know unless you tell them or they specifically search for it.

In other words, your friends, neighbors, and employers likely won’t find out unless they’re actively looking. The only exceptions are situations where a background check is required (e.g., for security clearance or financial jobs).

All Debts Are Erased in Bankruptcy

Truth: Not all debts can be discharged.

Bankruptcy helps eliminate or restructure many types of debt, but there are exceptions. Generally, the following debts are not discharged:

• Student loans (except in rare hardship cases)

• Child support and alimony

• Most tax debts

• Court-ordered restitution or fines

• Debts from fraud or malicious actions

Understanding what debt can and cannot be discharged is crucial before filing. A bankruptcy attorney can help you evaluate your options based on your unique financial situation.

You Can’t Get Credit Ever Again

Truth: Many people get credit offers shortly after bankruptcy.

Contrary to popular belief, you won’t be blacklisted from credit forever. Credit card companies and lenders know that after a bankruptcy discharge, you're in a better position because you’ve wiped out past debt. Many offer secured or high-interest cards to recent filers.

You can rebuild credit by:

• Using secured credit cards responsibly

• Paying all bills on time

• Keeping balances low

• Monitoring your credit score

With patience and discipline, you may qualify for car loans or even mortgages within a few years.

You Can Pick and Choose Which Debts to Include

Truth: You must list all your debts.

Some people think they can keep paying certain creditors—like family or their favorite credit card—while discharging others. That’s not how bankruptcy works.

The law requires you to list all debts and creditors, without exception. If you want to voluntarily repay a certain creditor after discharge, that’s your choice—but you must still list them in the filing.

Trying to hide or omit debt can result in penalties or even denial of your case.

Bankruptcy Is Only for Irresponsible People

Truth: Anyone can face financial hardship, regardless of how responsible they are.

Life is unpredictable. A sudden illness, natural disaster, layoff, or divorce can devastate even the most financially responsible person. The majority of bankruptcies are due to unforeseen events, not reckless spending.

In fact, studies show that most bankruptcies are caused by:

• Medical expenses

• Job loss

• Divorce or separation

• Economic downturns

Bankruptcy exists to give honest people a second chance—not to punish them.

You’ll Never Own a Home Again

Truth: You can buy a home after bankruptcy.

While you may have to wait a few years, bankruptcy doesn't permanently ban you from homeownership. FHA, VA, and even some conventional lenders have guidelines that allow home loans to borrowers with past bankruptcies—after a waiting period and credit rebuilding.

Typical waiting periods:

• Chapter 7: 2–4 years

• Chapter 13: 1–2 years after discharge

With stable income and a good payment history, you can absolutely qualify for a mortgage again.

Bankruptcy Will Destroy Your Spouse’s Credit

Truth: If you file alone, it doesn’t directly affect your spouse’s credit.

Unless you have joint debts or co-signed accounts, your spouse’s credit report remains unaffected by your individual filing. However, if you both owe money on a joint account, creditors may pursue the non-filing spouse for the full balance.

It’s important to review your debts carefully and consider whether filing jointly makes more sense in your situation.

Bankruptcy Is the Easy Way Out

Truth: Filing for bankruptcy is a serious and complex decision.

While bankruptcy provides relief, it also comes with consequences—like credit damage, legal fees, and financial scrutiny. It requires extensive documentation, court appearances, and long-term commitment (especially under Chapter 13).

It’s not a shortcut, but rather a structured legal process designed to help people in genuine financial distress.

You Can’t Discharge Medical Debt

Truth: Medical bills are one of the most commonly discharged debts.

Medical debt is a leading cause of bankruptcy in the U.S. Fortunately, bankruptcy can help eliminate this type of unsecured debt. Whether you have a few thousand dollars in hospital bills or overwhelming long-term medical expenses, bankruptcy can offer relief.

Debt Settlement Is Always Better Than Bankruptcy

Truth: Debt settlement may sound appealing, but it often comes with risks.

In debt settlement, you negotiate with creditors to pay less than what you owe. While this can work in some cases, it’s not guaranteed. Settlement companies often charge high fees, and creditors are under no obligation to agree. Plus, forgiven debt may be taxed as income.

If settlements fail, you may still end up filing for bankruptcy—but now with less money and more stress.

You Have to Be Completely Broke to File

Truth: You don't have to be penniless to qualify.

Bankruptcy isn't just for people with zero income. Many filers have jobs, assets, and savings. The key factor is whether you can reasonably pay your debts. The means test is used to determine your eligibility, especially for Chapter 7.

Even if you earn a good income, Chapter 13 may allow you to reorganize your debts into manageable payments.

Know the Truth and Make Empowered Decisions

Bankruptcy is a powerful legal tool—not a dirty word. The myths surrounding bankruptcy can discourage people from exploring an option that could offer real, lasting relief. By understanding the facts, you can make decisions that protect your financial health and give you a fresh start.

If you're considering bankruptcy, consult with a qualified bankruptcy attorney. They can help you evaluate your options, navigate the process, and protect your rights. Remember: bankruptcy isn’t the end—it’s a new beginning.