Here are 5 common myths about bankruptcy

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Although counterintuitive to many people, bankruptcy filings have fallen sharply since the start of the pandemic in 2020. Filings have been expected to rebound for some time. With mounting pressure from expired pandemic relief measures, rising inflation and rising interest rates, more people may find it necessary to explore their bankruptcy options. Although the decision to declare bankruptcy is daunting, it is important to know how it can bring relief. Here are five common bankruptcy myths.


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1. Bankruptcy is for deadbeats.

It is simply wrong. Common triggers for filing bankruptcy include job loss, serious illness, medical expenses, failure of a business venture, divorce, or other unforeseen circumstances. Most people who file for bankruptcy are honest, hard-working people who typically wait too long to file, spend retirement funds unnecessarily, and feel ashamed of their decision. The policy behind bankruptcy is to provide a “fresh start” and it is the right choice for many people.

Carrie Tatkin is a partner at Radix Law.

2. You will lose all your money and possessions.

Not so. Each state has exemptions to protect certain property, such as vehicles, retirement accounts, certain life insurance, household items, and even the equity in your home (Arizona protects up to $250,000 of net worth of your house). If you own assets that aren’t protected by the available exemptions, a Chapter 13 or Chapter 11 reorganization often allows you to keep all of your assets in exchange for paying off some of what you owe.

3. You cannot get rid of past tax debts in bankruptcy.

Yes, you often can. If you have filed your tax returns, most state and federal taxes can be discharged in bankruptcy if they are more than 3 years old and meet certain other criteria. There is no limit to the amount of income tax that can potentially be paid. Certain business-related tax obligations, such as source deductions or sales taxes, cannot be discharged, regardless of age. Yet, bankruptcy options can be weighed with a view to clearing all possible debts, leaving only a manageable amount of undischargeable obligations.

4. If you are married, both spouses must declare bankruptcy.

Again, not true. Arizona is a community owned state. It is often desirable for spouses to file jointly, but in limited circumstances it may make sense for only one spouse to file an application. When a spouse files for bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse’s community discharge. A creditor with a claim against the non-filing spouse can only recover his debt from the non-filing spouse’s own assets. Sometimes such a separate property does not exist.

5. Bankruptcy leads to divorce and the destruction of family relationships.

Often quite the opposite. The relief that clients feel after receiving their bankruptcy discharge can be immense. The stress of creditor harassment is gone. The ability to start fresh, usually with a renewed commitment to financial security, is always appreciated by customers. While bankruptcy can often accompany a divorce, well-timed bankruptcy can be a decision that puts families in a healthier and more collaborative place.

Many more myths and misinformation are circulating, so it is important to ensure that individuals have accurate information as they view bankruptcy as a potential path to a better financial future.

Carrie Tatkin is a partner of basic law, with a practice focused on consumer and business bankruptcy, representing both creditors and debtors. With over 35 years of legal experience, Carrie is adept at handling all aspects of her clients’ bankruptcy cases.

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