There are a lot of common bankruptcy misconceptions out there. Fears caused by these bankruptcy myths discourage consumers from filing for bankruptcy and getting relief from taxes, credit cards, and student loans.
Myth #1: Taxes cannot be discharged in bankruptcy.
Not true, certain taxes cannot be discharged in bankruptcy. For example, payroll taxes and/or priority taxes are not dischargeable. Taxes due from tax returns that were never filed are not dischargeable.
The formula that determines whether income taxes are dischargeable in bankruptcy is complicated. To keep it simple, if your tax debt is from a tax return that is a least three years old, there is a good chance those Federal and State taxes can be discharged in a bankruptcy.
Myth #2: Student loans cannot be discharged in bankruptcy.
Not true. In a joint press release from February 2025, the Department of Justice and the Department of Education reported that from November 2022 through March 2024:
- 1,220 student-loan bankruptcy cases were filed under the new process.
- In cases decided by the courts, 98% resulted in full or partial discharge of federal student loan debt.
- 96% of borrowers in these cases chose to use the new streamlined attestation process.
An empirical study published in 2025 in the Emory Bankruptcy Developments Journal found that in the first 23 months after the IRS guidance:
- 2,514 new student loan adversary proceedings were filed… a 330% increase compared to a similar period before the guidance.
- Even with that big jump, fewer than 1% of bankruptcy filers with student loans are attempting to discharge them.
Myth #3: If your income is too high, you can’t file for bankruptcy.
Not true. If one’s income is too high, then a Chapter 7 bankruptcy may not be available. However, higher-income earners can file a Chapter 13 or Chapter 11 bankruptcy.
Myth #4: I will lose my home and/or cars if I file a Chapter 7 Bankruptcy.
Not true. A Debtor can file a Chapter 7 bankruptcy and keep their cars and home by reaffirming the debt.
Myth #5: I can only file for Bankruptcy every eight years.
There are different waiting periods depending on which chapter of bankruptcy one files for.
For instance, after filing a Chapter 7 and receiving a discharge, the debtor is eligible to file a Chapter 13, and the waiting period is only 4 years.
In fact, there are provisions in the bankruptcy code that allow a second bankruptcy to be filed immediately after the first bankruptcy is discharged. A debtor can file a Chapter 7 to discharge all their unsecured debt (credit cards). As soon as the first bankruptcy is discharged, the debtor can file a Chapter 13 to pay off the debt that was not discharged in the first bankruptcy. This is commonly called a Chapter 20. (Chapter 7 + Chapter 13 = Chapter 20.)
Myth #6: A bankruptcy filing ruins your credit for 10 years.
A bankruptcy stays on one’s credit report for 10 years, but a debtor’s credit score is negatively affected only until the bankruptcy discharge has been ordered by the court.
Once the bankruptcy is discharged and you are relieved of all your debt, your credit score starts to improve. The main reason for the improvement is that the bankruptcy discharge lowers one’s debt-to-income ratio, making the debtor a much better credit risk.
Myth #6: Filing bankruptcy is a bad thing to do and is caused by financially irresponsible consumers.
This is probably one of the most common bankruptcy misconceptions out there. Bankruptcy is legal and neither good nor bad. Bankruptcy is a tool that enables consumers to get out from under insurmountable financial problems, including Federal and State taxes and student loans.
Further, a large percentage of people filing for bankruptcy are doing so because of circumstances beyond their control. The failure of a business, the death of one of the breadwinners, prolonged unemployment, hospitalization, or sickness that causes a significant decrease in income. Don’t let common bankruptcy misconceptions like this prevent you from exploring this legal option for financial relief.