Three myths about filing bankruptcy in Massachusetts

Many people misunderstand how filing bankruptcy will affect their finances and credit, their ability to keep their property, and their liabilities.

Filing bankruptcy provides a lifeline to many people in Massachusetts who face substantial and insurmountable debt. According to data from the U.S. Bankruptcy Courts website, in 2016, over 8,000 individuals in Massachusetts filed for relief under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Unfortunately, despite this large number of bankruptcy filings, many state residents still harbor misconceptions about the process that may cause them to dismiss bankruptcy as a solution or enter into it with inaccurate expectations.

1. Property loss

Many consumers believe that filing bankruptcy always results in the loss of a person’s home and other possessions, but this is not the case. In Chapter 13 bankruptcy, consumers repay their debts over a three- to five-year period, and they may keep their secured assets by remaining current on the necessary payments. Chapter 7 bankruptcy involves the liquidation of assets to repay debt, but this does not mean that consumers lose all of their property in this chapter of bankruptcy.

Massachusetts state law and the U.S. Bankruptcy Code both allow debtors to claim certain assets as exempt from liquidation during Chapter 7 bankruptcy. Consumers may choose one set of exemptions to protect a specified value of their home, vehicle, insurance benefits, retirement benefits and personal items. In some cases, creditors may choose not to seize other assets that are not worth liquidating due to low value. Additionally, consumers may opt to reaffirm certain debts, such as mortgages or auto loans, to keep the associated property.

2. Debt discharge

Another common misunderstanding about bankruptcy is that it allows for the elimination of all debts. There are several types of debt that are non-dischargeable, except in cases of extreme hardship. These include spousal and child support; student loans; certain forms of tax debt; and criminal fines. Furthermore, in Chapter 13 bankruptcy, the discharge of eligible debts only occurs if a person successfully completes his or her court-ordered debt repayment plan.

3. Financial impacts

Many people believe that filing bankruptcy will be a significant setback in terms of their finances and credit. However, consumers should keep the following facts in mind:

· Exemptions may allow a person to keep property that she or he might otherwise be forced to sell to repay debt.

· The expenses associated with filing bankruptcy may be significantly less than the costs of allowing debt to continue accumulating.

· Filing bankruptcy may be the fastest way to improve a credit score, as it may eliminate debt and allow a person to begin rebuilding credit sooner.

Consumers should remember that, although a bankruptcy filing remains on a credit report for as long as ten years, its presence does not always preclude a person from receiving credit. People who use secured cards to being rebuilding their credit may qualify for credit cards or even loans within a few years of the debt discharge.

Moving forward

Given the huge impacts that filing bankruptcy can have on a person’s life, it is critical that consumers have a clear understanding of what to expect from the process before they make any binding decisions. To this end, anyone who is struggling with debt may benefit from speaking to an attorney for further information about the potential benefits, drawbacks and impacts of filing bankruptcy.