Common Myths About Filing for Bankruptcy in Alabama

Bankruptcy offers individuals and families the chance to regain control of their finances during difficult times. Despite its legal protections and long-standing role in financial recovery, bankruptcy remains misunderstood by many. These misconceptions often prevent people from exploring a legitimate path toward stability.

If you’re considering bankruptcy in Alabama, it’s essential to separate fact from fiction. Below are some of the most common myths surrounding bankruptcy and the truths that can help you make informed decisions.

Myth 1: You’ll Lose Everything You Own

Fact: Many people are able to keep most, if not all, of their property when they file for bankruptcy.

Alabama law provides exemptions that allow you to protect certain types of property during bankruptcy. These exemptions are limited in dollar value but can include:

• A portion of the equity in your primary residence (homestead exemption)
  
• Clothing, appliances, and basic household furnishings
  
• Tools of your trade
  
• Certain retirement accounts and pensions
  
• Up to $7,750 worth of personal property per individual (as of 2023)
  

In most Chapter 7 cases, if your assets are within the exemption limits, the trustee will not liquidate them. In Chapter 13, you keep your property and repay debts over time based on your income and assets.

Myth 2: Bankruptcy Permanently Destroys Your Credit

Fact: While bankruptcy will impact your credit, the damage is not permanent.

A bankruptcy filing will remain on your credit report for:

• 10 years for Chapter 7
  
• 7 years for Chapter 13
  

However, many people are surprised to learn that their credit begins to rebound shortly after discharge. Without the weight of overwhelming debt, it’s easier to make timely payments and demonstrate responsible financial behavior.

Some debtors qualify for secured credit cards, auto loans, and even mortgages just a few years after bankruptcy—especially if they build positive credit history during that time.

Myth 3: Bankruptcy Discharges All Debts

Fact: While many unsecured debts are discharged, some types of obligations remain after bankruptcy.

Bankruptcy can eliminate:

• Credit card balances
  
• Medical debt
  
• Unsecured personal loans
  
• Payday loans
  
• Deficiency balances on repossessed vehicles
  

However, you cannot typically discharge:

• Child support and alimony
  
• Most student loans (unless extreme hardship is proven)
  
• Recent income taxes
  
• Court fines, criminal restitution, or debts from fraud
  

Understanding which debts will and won’t be discharged is essential to evaluating whether bankruptcy is the right option for your situation.

Myth 4: Filing for Bankruptcy Means You’ve Failed

Fact: Bankruptcy is a legal and financial tool—not a reflection of personal failure.

Many people file for bankruptcy due to circumstances beyond their control, such as:

• Job loss or reduced income
  
• Divorce or separation
  
• Medical emergencies and hospital bills
  
• Unforeseen expenses like home repairs or funeral costs
  

Federal bankruptcy law exists to provide people with a structured and lawful way to reset their finances. Taking advantage of legal protections to secure a fresh start is a rational and proactive step—not a moral failing.

Myth 5: Both Spouses Must File Bankruptcy Together

Fact: Married individuals can file separately or jointly, depending on the situation.

There is no legal requirement that both spouses must file. Often, one spouse has the bulk of the debt or has experienced financial hardship independently. However, it’s important to consider:

• Whether debts are in one or both spouses’ names
  
• How property is owned (jointly or separately)
  
• Whether the non-filing spouse’s assets could be impacted
  

A bankruptcy attorney can help determine whether a joint or individual filing is the better choice based on your household’s structure and finances.

Myth 6: Bankruptcy Is Only for the Unemployed or Low-Income

Fact: Bankruptcy protection is available to individuals at all income levels.

Eligibility for Chapter 7 is based on the means test, which compares your household income to the Alabama median for your family size. Even if your income is above the median, you may still qualify after deductions for necessary expenses.

Chapter 13 is often used by individuals who:

• Have a regular income
  
• Want to protect property from foreclosure or repossession
  
• Need to catch up on child support, tax debt, or mortgage arrears
  

Bankruptcy is about your overall financial picture—not just your income.

Myth 7: Once You File Bankruptcy, You Can Never Get Credit Again

Fact: Many people begin rebuilding credit shortly after bankruptcy is complete.

While you may need to wait a period of time for larger loans like mortgages, options like secured credit cards, retail accounts, and even auto loans may be available much sooner.

Lenders often see bankruptcy as a sign that a borrower has eliminated prior debt and is now in a better position to repay new obligations.

Steps to rebuild credit include:

• Paying all bills on time
  
• Keeping debt levels low
  
• Monitoring your credit report for errors
  
• Using new credit responsibly
  

Myth 8: You Can’t File Bankruptcy Again If You’ve Done It Before

Fact: You can file again, though there are limits on how often you can receive a discharge.

Here are some of the general timeframes:

• Chapter 7 after Chapter 7: 8 years from the date of the first filing
  
• Chapter 13 after Chapter 7: 4 years
  
• Chapter 13 after Chapter 13: 2 years
  
• Chapter 7 after Chapter 13: 6 years (with exceptions)
  

Multiple filings are permitted under law, especially if the debtor experienced new financial hardships or did not receive a prior discharge.

Myth 9: Bankruptcy Will Automatically Stop a Foreclosure or Garnishment Forever

Fact: Bankruptcy provides temporary protection, but it may not stop all legal actions permanently.

The automatic stay goes into effect as soon as a bankruptcy case is filed. It halts most collection efforts, including:

• Foreclosure
  
• Vehicle repossession
  
• Wage garnishment
  
• Harassing calls and letters
  

However, creditors can petition the court to lift the stay in certain cases. In Chapter 13, long-term protection requires adherence to a repayment plan. In Chapter 7, the stay may only last a few months unless further legal protections are in place.

Myth 10: Bankruptcy Solves All Financial Problems

Fact: Bankruptcy is a powerful tool, but it works best as part of a broader financial plan.

Bankruptcy eliminates certain debts, but it does not:

• Guarantee financial stability
  
• Eliminate the need for future budgeting and credit management
  
• Protect against new debts incurred after filing
  

Successful financial recovery involves setting goals, creating a realistic budget, and using credit responsibly moving forward.

Final Thoughts on Bankruptcy Misunderstandings

Misconceptions about bankruptcy often prevent people from pursuing meaningful debt relief. If you’re struggling with mounting bills, wage garnishment, or unmanageable credit card balances, learning the truth about bankruptcy can help you regain a sense of control and explore your legal rights.

The bankruptcy process in Alabama may seem complicated at first, but clear legal guidance can simplify your decisions and put you on the path to financial relief.

If you’re ready to discuss your options in a confidential setting, Padgett & Robertson is here to assist.

Call (251) 336-3695 today to schedule a consultation and get the facts you need to make a confident choice about your financial future.