Bankruptcy Myths That Stop People from Filing (And Why They’re Wrong)

For individuals and small business owners struggling with overwhelming debt, bankruptcy is often viewed as a last resort—or worse, a personal failure. Much of that hesitation is driven not by the law itself, but by persistent myths and misconceptions about what filing for bankruptcy actually means. In reality, bankruptcy is a legal and financial tool designed to provide relief, protect assets, and offer a structured path forward when debt becomes unmanageable.

Understanding the facts behind these common myths can help people make informed decisions about whether bankruptcy is the right option for their situation. For personalized advice tailored to your particular situation, contact Rounds & Sutter, LLP, for a free consultation with an experienced and dedicated Ventura bankruptcy lawyer.

Myth #1: Filing for Bankruptcy Means You Lose Everything

One of the most enduring myths about bankruptcy is that filing automatically results in the loss of all property, including your home, car, and personal belongings. In practice, bankruptcy law is built around exemptions: legal protections that allow filers to keep essential assets.

In California, debtors can choose between two exemption systems, both of which are designed to protect necessities such as equity in a primary residence, vehicles up to a certain value, household goods, retirement accounts, and tools of the trade. In many well-crafted Chapter 7 cases, individuals lose no property at all. Chapter 13 filers, meanwhile, typically retain all of their assets while repaying a portion of their debts through a court-approved repayment plan.

The idea that bankruptcy leaves people destitute is simply inconsistent with how modern bankruptcy law works.

Myth #2: You Will Immediately Lose Your Job

Many people worry that filing for bankruptcy will automatically cost them their job or prevent them from being hired in the future. For most employees, this fear is unfounded. Federal law generally prohibits private employers from firing someone solely because they filed for bankruptcy. While certain sensitive positions, such as high-level financial roles or security-clearance jobs, may involve additional scrutiny, bankruptcy alone is not a lawful basis for termination in the vast majority of cases.

For small business owners, bankruptcy does not mean the business must shut down. Depending on the chapter filed, bankruptcy may allow continued operation while debts are restructured or discharged.

Myth #3: Bankruptcy Follows You Forever

Another common misconception is that bankruptcy permanently ruins your financial life. While a bankruptcy filing does remain on your credit report for a period of time (ten years for Chapter 7 and seven years for Chapter 13), it does not prevent future financial recovery. In fact, many filers see their credit scores improve within a year or two after bankruptcy because their debt-to-income ratio improves and delinquent accounts are eliminated. With responsible financial habits, it is often possible to qualify for credit cards, auto loans, and even mortgages sooner than people expect.

By contrast, carrying large amounts of delinquent debt, facing lawsuits, or having accounts sent to collections can be far more damaging to long-term credit health than a single bankruptcy filing.

Myth #4: Bankruptcy Is Worse Than Debt Settlement

Some individuals believe that debt settlement or negotiation is always a better alternative than bankruptcy. While debt settlement can be useful in certain situations, it carries its own risks and limitations.

Debt settlement does not stop lawsuits, wage garnishments, or collection actions unless creditors voluntarily agree. Settled debts may also be reported as taxable income, creating unexpected tax consequences. Additionally, many people struggle to complete debt settlement programs, particularly when balances are high or income is unstable.

Bankruptcy, by contrast, triggers an automatic stay that immediately stops most collection efforts, lawsuits, foreclosures, and garnishments. It provides a single, legally enforceable resolution rather than a series of individual negotiations that may or may not succeed.

Myth #5: Filing Means You Were Financially Irresponsible

Perhaps the most personal myth surrounding bankruptcy is the belief that it reflects poor character or irresponsible behavior. In reality, many bankruptcies are caused by circumstances outside a person’s control. Medical emergencies, job loss, divorce, rising interest rates, and business downturns are among the most common reasons people seek bankruptcy protection.

For small business owners, bankruptcy is often a strategic decision tied to market conditions, supply chain disruptions, or unexpected cash-flow issues, not personal failure. The bankruptcy system exists precisely because financial hardship can affect even the most diligent individuals and business operators.

Myth #6: You Can’t File If You Make “Too Much Money”

Income alone does not determine whether someone can file for bankruptcy. While Chapter 7 includes a means test to assess eligibility, many individuals who exceed the median income still qualify after accounting for allowable expenses. Those who do not qualify for Chapter 7 may still be eligible for Chapter 13, which is designed for people with regular income who can repay a portion of their debts over time.

For business owners, Chapter 11 or Subchapter V may provide restructuring options even when income levels are relatively high.

Bankruptcy Is a Legal Tool—Not a Financial Dead End

Bankruptcy is not a one-size-fits-all solution, and it is not appropriate in every situation. However, the myths surrounding bankruptcy often prevent people from exploring an option that could provide meaningful relief and long-term stability.

Understanding how bankruptcy actually works, including what it does and does not do, can help individuals and business owners move past fear and misinformation. With accurate information and proper legal guidance, bankruptcy can be a powerful step toward regaining financial control rather than a permanent setback.

If you are facing unmanageable debt, learning the facts is the first step toward making an informed decision about your financial future. In Oxnard, Camarillo, and surrounding areas in Southern California, contact Rounds & Sutter, LLP, in Ventura for a free consultation.