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12 myths about bankruptcy

Like most big, bad scary things, bankruptcy has a reputation based on a few tidbits of truth and lots of embellishment. And like most creepy crawlies, it's not nearly as frightening once you know the truth.

With a mind toward declawing the monster, here are a dozen misconceptions about bankruptcy:

1. Everyone will know I've filed for bankruptcy. Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While it's true that bankruptcy is a public legal proceeding, the numbers of people filing are so massive, very few publications have the space, the manpower or the inclination to run all of them, although some local newspapers do print the names of those that have filed in that community.

2. All debts are wiped out in Chapter 7 bankruptcy. You wish. Certain types of debts cannot be discharged, or erased. They include child support and alimony, student loans, restitution for a criminal act and debts incurred as the result of fraud.

3. I'll lose everything I have. This is the misconception that keeps people who really should file for bankruptcy from doing it, says Chris Viale, chief operating officer of Massachusetts-based Cambridge Credit Counseling Corp.

"They think the government will sell everything they have and they'll have to start over in a cardboard box," Viale says.

While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

"For most people, they'll pass through a bankruptcy case and keep everything they have," says John Hargrave, a bankruptcy trustee in New Jersey. If you have a mortgage or a car loan, you can keep those as long as you keep making the payments (like the rest of us).

4. I'll never get credit again. Quite the contrary. It won't be long before you're getting credit card offers again. They'll just be from subprime lenders that will charge very high interest rates. "There are innumerable companies that will provide credit to you," says California bankruptcy attorney and trustee Howard Ehrenberg. "I don't advise any of my clients to run out and run up the bills again, but if someone does need an automobile, they can go and will be able to get credit. You don't have to go underground or something to get money."

5. If you're married, both spouses have to file for bankruptcy. Not necessarily. "It's not uncommon for one spouse to have a significant amount of debt in their name only," Hargrave says. However, if spouses have debts they want to discharge that they're both liable for, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn't file.

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