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Busting bankruptcy myths

Many people across the country, including Arizona residents, may think that struggling with debt and making minimum payments that keep their heads above water, but don't decrease the principal balance owed, is better than declaring bankruptcy. For various reasons, Arizona residents may feel that declaring bankruptcy is equivalent to gaming the system and running away with debt or an immoral act that responsible people simply should not do. However, this is not the case at all-bankruptcy is a method by which people who have made financial mistakes can admit their mistakes and move on from them using a vehicle that has been provided for them by federal law.

In addition to the social stigma related to bankruptcy, there is also the assumption that people who file for bankruptcy either lose everything or that they will never be able to recover from the impact that bankruptcy has on their credit scores.

In fact, according to a study conducted by the Federal Reserve Bank of New York, people who declared bankruptcy actually had more access to credit lines than those who struggled along in poor financial situations. In fact, it is possible to get car financing within a year of declaring bankruptcy and good mortgage rates within three years, in most cases. In addition to this, those who declare bankruptcy see a sharp boost in their credit score, whereas those who don't, but continue to limp along, see a much slower financial recovery rate. Furthermore, people who avoid filing for bankruptcy, but who are having financial difficulties, also may lose out on retirement savings.

Bankruptcy protection is a federal guarantee provided to those who need it and Arizona residents should not pay heed to the myths surrounding the process. Actually, Arizona offers a comprehensive list of bankruptcy exemptions, meaning that Arizona residents filing for personal bankruptcy do not lose many household and personal items; the loss of all personal assets is just another myth circulating about bankruptcy. A bankruptcy attorney may be able to provide more details about the assets that debtors can keep during bankruptcy.

Source: Fox Business, "How avoiding bankruptcy can backfire," Steve Rhode, March 2, 2015