2. All debts are wiped out in Chapter 7 bankruptcy.
You wish. Certain types of debts cannot be discharged (erased). They include child support, alimony, government-issued or government-guaranteed student loans, and debts incurred as the result of fraud. It's also very unlikely that a judge will discharge legal settlements you've been assessed, such as money you've been ordered to pay to someone who sued you.

3. I'll lose everything I have.
This is the misconception that keeps people who really should file for bankruptcy from doing it, says Chris Viale, chief operating officer of Massachusetts-based Cambridge Credit Counseling Corp.

"They think the government will sell everything they have and they'll have to start over in a cardboard box," Viale says.

While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

"For most people, they'll pass through a bankruptcy case and keep everything they have," says John Hargrave, a bankruptcy trustee in New Jersey. If you have a mortgage or a car loan, you can keep those as long as you keep making the payments (like the rest of us).