New York’s economy is struggling through a perfect storm caused by the implosion of the construction and real estate industries and exacerbated by record high unemployment. Many people can barely pay their daily living expenses, and in some cases, they must choose between paying an “upside down” mortgage or their living expenses. For some, bankruptcy can provide much needed relief, but often they choose to avoid bankruptcy or they simply wait too long to take action.

Misconceptions abound about

bankruptcy, as well as bankruptcy alternatives such as short sales and loan modifications, which can make matters worse and serve as mere preludes to an eventual bankruptcy filing.

Here are five of the most common myths about bankruptcy:

Debtors who file for bankruptcy usually can keep their homes as long as they remain current on their monthly payments. In fact, a debtor can often go through a bankruptcy, reaffirm his primary mortgage, fully discharge his second mortgage, and come out still owning his home and immediately building equity. This can be the key to getting back on track to financial success.

2. I should try to work with my lender to modify my loan.

Lenders are quick to offer a loan modification program for two primary reasons: they often receive a fee from the federal government for each loan modification they make and the loan “modification” typically involves keeping intact the first and second mortgages, which temporarily reduces the monthly payments and adds years of extra payments to the end of the loan. In many of these cases, the lender merely extends the life of the loan (thus collecting additional interest) and receives a check from the federal government for doing so.

In addition, lenders will almost always require a borrower to go into default for up to three months prior to considering a loan modification request. Because the borrower is then in default, the lender has the right to start a trustee’s sale to sell the borrower’s home in the event the loan modification request is denied. Clients bring us stories of this troublesome situation all too often, thinking they were in the middle of a loan modification process and therefore the lender could not foreclose on their home. Unfortunately, the lender is within its legal rights to do so.

3. If my lender approves a short sale, my mortgage debt will be forgiven.

A “short sale” is the sale of a house for less than the amount owed on the mortgage or mortgages. A short sale requires the lender’s permission. The standard short sale agreement proposed by most lenders is typically not fully understood by the borrower. In a short sale transaction, without proper documentation and legal counsel, an otherwise unenforceable deficiency claim can become a significant liability. Obviously, this is exactly the opposite result sought by people going through a short sale and, in the end, may actually force the borrower to file for bankruptcy.

4. I should pursue a “strategic” foreclosure.

I frequently hear cases where a person strategically allowed their home to be foreclosed. In reality, there is nothing “strategic” about such a decision. A foreclosure is, in my opinion, always a less desirable alternative than bankruptcy. In fact, in evaluating a person’s creditworthiness, a foreclosure on a credit report generally is worse than a bankruptcy or a tax debt. In my experience, a lender would prefer to work with a borrower who filed for bankruptcy protection, rather than with one who has a foreclosure on his or her record.

5. It is better to settle my credit card debt than to discharge it.

A common pitfall for people with credit card debt is to try to negotiate relief on their own or through one of the debt relief agencies advertising on late-night television. These debt relief agencies generally charge a hefty fee, and may not accomplish the desired result. Even when the debtor or debt relief agency successfully negotiates a compromise settlement, the debtor may be subject to income tax liability on the canceled or forgiven debt. In a bankruptcy proceeding, however, a debtor can frequently eliminate all credit card debt without incurring tax liability.