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Myths regarding bankruptcy continue to abound

This blog has carried several stories on the number of people in Ohio, and across the country, who have chosen to file for personal bankruptcy in recent years. The numbers continue to rise to near the levels experienced before the law was changed in 2005. The basic types of bankruptcy were not changed, the differences mainly are found in what options people have available based upon their asset structure and income.

The main two forms of personal bankruptcy remain a chapter 7 and a chapter 13 bankruptcy. A chapter 7 bankruptcy is known as a liquidation bankruptcy, as non-exempt assets are sold for the benefit of creditors. Many people may not have a significant amount of non-exempt assets if they otherwise qualify for chapter 7 bankruptcy. The other type of filing is under chapter 13. People with significant assets may choose chapter 13. The 2005 bankruptcy laws require those whose income exceeds the median income in Ohio after a complex means test calculation to file under chapter 13.

A chapter 13 bankruptcy includes a payment plan that must be approved in the bankruptcy proceeding. A person filing for chapter 13 can often retain all of their property through this type of bankruptcy. Still some common myths seem to remain about the bankruptcy process.

The following are several misconceptions regarding bankruptcy that may hinder a person's interest in seeking out such help.

Myth: After the 2005 changes fewer people can qualify to file for bankruptcy.

Before the law changes, limitations on who could file existed. All individuals in financial distress can now file for some form of bankruptcy protection. Generally, the options available are based upon total assets and income. But the law does not bar a person drowning in debt from filing for protection under the bankruptcy code.

Myth: All assets will be included in the bankruptcy.

Some assets are exempt from the bankruptcy proceeding. Generally, these include retirement accounts, so that upon retirement these funds will be available even after bankruptcy. The law also does not require an individual to become destitute and exemptions exist in Ohio for specied amounts of a variety of different types of goods.

Myth: Bankruptcy will negatively affect credit forever.

A bankruptcy filing will remain on a credit report for 10 years. Thereafter, it will be difficult for creditors to spot it. Even during the 10-year period though, many people are offered credit once the bankruptcy filing has been discharged and finalized. While bad debt remains on a credit report for seven years, it is less clear when that clock actually starts in many cases where the debt is not written off as the person continues to service the debt but cannot do so.

Myth: Bankruptcy may only be filed once in a lifetime.

Even though there are limits on when and how many times one can file for bankruptcy relief, it is possible to file for bankruptcy more than once.

Source: Investopedia, "5 Myths About Personal Bankruptcy," Angie Mohr 5 May 2011

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