The ultimate goal of bankruptcy is to help people recover from difficult financial situations when substantial debt has been accumulated. There are several options that people in this situation can take advantage of. Each type of personal bankruptcy has its own rules and requirements. Understanding the basic concepts behind the different types of bankruptcy can help individuals who are struggling financially make good decisions about their future.

The two most common options for personal bankruptcy are known as Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, most assets are liquidated and the proceeds are distributed to creditors. A Chapter 13 bankruptcy is often used instead if the person owns substantial assets such as real estate and vehicles. Under this scenario, the assets may be retained and a payment plan is implemented to pay off creditors over time.

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

  • 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.
  • 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.
  • 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.

Bankruptcy law is extremely complex. This post is meant to serve as a general introduction to bankruptcy concepts and to clarify some common misconceptions. Those facing a financial crisis should understand all of their options to determine if bankruptcy may be the correct option to help with debt relief.

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