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Misconceptions about Chapter 7 bankruptcy

Many New York residents may be hesitant to file for Chapter 7 bankruptcy because they underestimate its advantages as a debt relief tool and have a range of misconceptions about the actual effects of Chapter 7 bankruptcy. Understanding the realities of Chapter 7 can help consumers make a better informed decision about whether filing for bankruptcy is the right step for them.

A good number of consumers may not even investigate the possibility of filing Chapter 7 bankruptcy because they believe they are not sufficiently indebted or broke to qualify. This is not true, however. Although there are some eligibility requirements related to numbers, the basic requirement is that a consumer is unable to pay his or her debts as they come due. In fact, filing bankruptcy before a person is truly broke or destitute is generally a smarter decision because it preserves a greater number of potential options for the debtor.

Another common misconception is that filing for bankruptcy will prevent a consumer from ever qualifying for or receiving credit in the future. Although it is true that a bankruptcy filing will appear on a person's credit report for ten years, it will eventually disappear. Additionally, a person is only able to file for Chapter 7 bankruptcy and discharge his or her debts every seven years. This means that many creditors will extend credit offers to consumers who recently filed bankruptcy because they can be assured that the consumer will be unable to file again and discharge any debts for at least seven years.

Two other common misconceptions relate to a consumer's home. Many people believe that filing for bankruptcy will prevent them from ever being able to buy a home in the future or that a bankruptcy filing will result in the loss of their home. The first of those is entirely untrue. Although a bankruptcy filing could cause a lender to require a larger down payment or charge higher interest rates, many lenders will still extend mortgages to a consumer who has filed bankruptcy in the past. The question of whether bankruptcy will cause the loss of a home is more complicated. Although it is possible that a trustee will liquidate a person's home in a Chapter 7 bankruptcy filing in order to use the proceeds to repay debt, in many situations, the New York homestead exemption will allow a person to keep the home. This is especially true in cases where the consumer has little equity in his or her home.

Source: CPA Journal Online, "Top 10 Misconceptions About Bankruptcy," Neil E. Colmenares, Accessed on Oct. 28, 2014

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