 So you have filed for bankruptcy. What's the next step?
At first blush, you are full of ideas on how you
are getting a fresh start. You have freed yourself from almost all of
your debts and you are, for all intents and purposes (financially, at
least), a new person.
But note that you had to pay a dear price by
filing bankruptcy. In exchange for a discharge of your debts and
stopping your creditors from pursuing any collection actions against
you, your credit rating took the brunt of the blow.
Considering how your credit rating was probably
not all that great to begin with, this recent hit is not going to be an
easy one to recover from.
Let's start with the bad news:
- The bankruptcy will stay on your credit report for up to 10 years.
- You would seem a bad risk to lenders because you have legally written off at least some of your past debts.
- As a consequence, you may not be able to get a loan or a credit card for some time after the bankruptcy.
- And if you do get lucky and get approved for credit, the interest rates and fees attached will be rather punishing.
The silver lining? Think positive. It is good
that you are restricted from getting new credit. Credits were what you
got bankrupt in the first place. They will have no difficulty getting
you in that place...again.
Now, for the rebounding tips to help you climb back up from the pits of bankruptcy:
Lead a Frugal Lifestyle
Common sense dictates that you lead a simpler
lifestyle - properly slimmed-down, no frills attached. In other words,
be frugal.
If you filed under Chapter 13 bankruptcy, it
means that you have signed up for a repayment plan to pay off some of
your debts. The purpose of Chapter 13 bankruptcy is to allow debt
reorganization so that you can continue holding on to your properties
and other assets in exchange for obliging yourself to pay your debts
for some number of years. The bottom line, thus, is that you are still
in debt, albeit, you may only pay a portion of the total debt to your
creditors.
The usual period given by bankruptcy courts with
which you can pay off your debts is within three to five years. During
this time, the court allows you only a set amount to live on while the
court-appointed trustee divides the rest among your creditors each
month.
What does this mean to you?
As we earlier said, it means a no-frills
lifestyle. No luxuries whatsoever, except those exempted under the law.
And sometimes, just sometimes, it may also mean changing your basic
expenses, such as how much you pay for shelter and groceries every
month. You may even have to move to a cheaper apartment or a more
low-end neighborhood just so you can get by with the amount the court
allows you.
Suffice to say that getting new credit will be a
hard feat, if not downright impossible. So you can forget about getting
a new credit card or a car loan. Or at least, getting it the easy way.
Besides, you can't take on a new debt without the court's permission
anyway, and getting that means adding an awful lot of complexity in
your life.
So how do you go about with hardly anything to
tide you over through the hard times ahead? It's simple really - make a
budget. Better yet, keep a close watch on your expenses for three
months and make a budget based on any observations you have made on
your spending habits.
This is exactly what Greg McBride, CFA, senior financial analyst for Bankrate.com advises.
"Track your expenses for three months to get an
idea of how much you're spending and where that money is going. Then
create a realistic budget that fits within your monthly income," he
says. "The first step to saving is to set boundaries on your spending."
And after making a budget, stick to it. That's the most significant part.
Work on Rebuilding Your Credit
Ah yes, the 800-pound gorilla that you would have
to take on - rebuilding credit. Fortunately for you, filing bankruptcy
does not have quite the same social and financial stigma it once did
ten, maybe twenty years ago.
"The purpose of filing is a safety valve," says
Roger M. Whelan, resident scholar of the American Bankruptcy Institute,
a nonprofit professional organization. "Thank God, the day in which it
was like wearing a blazing star on your forehead is over."
But rebuilding credit is the double-edged sword
of post-bankruptcy life. You have gotten to where you are now because
you mismanaged your credit. However, this does not mean that you would
have to steer clear from credit from now on. At first, you may have to,
as you are given little choice on the matter. But sooner or later, you
find that you have to get credit to rebuild your financial life.
So what are the rules? There are no rules; that's
the best part about it. It does not matter how you do it or how fast.
The factors can vary widely from the kind of resources you have and the
type of bankruptcy you filed for.
For instance, if you filed under a Chapter 13
bankruptcy, the bankruptcy will stay in your credit for five to seven
years. Whereas, if you filed under Chapter 7 bankruptcy, the bankruptcy
could stay longer in your credit report - say, up to ten years. During
that period, it is going to be very, very difficult for you to get
credit, let alone work on rebuilding yours from bad to good. And yet,
rebuild you must, if you want to get back in the financial game.
Now, if you have a high dollar income, then
obviously you are going to have a slightly better edge over the rest.
But just slightly. If you managed to hang onto your house, paying your
mortgage on time will improve credit report.
But remember that "many apartments don't report
to credit bureaus, so those payments will keep a roof over your head
but won't help you rebuild your credit," warns John Ulzheimer, business
development manager for MyFico.com, a division of Fair Isaac Corp., the
company that developed credit scoring.
Ironically enough, while Chapter 7 bankruptcy
filers generally have a hard time getting approved for new credit, they
are also generally the ones that have a better chance at rebuilding
their credit.
Henry Sommer, an attorney and author of "Consumer
Bankruptcy: The Complete Guide to Chapter 7 and Chapter 13 Personal
Bankruptcy" says that "while you're in a Chapter 13 (reorganization),
your options are somewhat limited in terms of credit." That's because
you cannot really apply for new credit without getting the court's
permission first.
Conversely, under a Chapter 7 bankruptcy, you are
given more freedom in that area as all your debts are discharged. The
sooner your debts are discharged, the sooner you can get to working on
repairing your credit.
Adopt a Positive Attitude and Show What You have Learned
Experts on bankruptcy insist that attitude and
persistence can make a difference on your life after filing for a
Chapter 7 bankruptcy or Chapter 13 bankruptcy.
"The consumer who's going to recover faster is the consumer who jumps back in," says Ulzheimer.
"Financial capacity is one thing," says Tahira K.
Hira, a professor at Iowa State University who specializes in consumer
economics and family finance. "Mental or attitudinal capacity is the
other thing."
So being positive can make a whole world of
difference. "...If you build a savings account, carry no debts and have
an emergency fund, you're saying, 'Look, I can control my behavior,"
Hira adds. "It depends on how good a salesperson you are and how good
your behavior has been."
And, of course, by behavior, she means your
financial behavior or how you carry yourself around expenses and
financial obligations.
"Pay your bills on time" is the name of the game.
It is also incidentally the easiest method to show to your lenders that
you have learned from your past financial mistake and are making every
effort never to fall into that trap again. In brief, you've got to be a
model citizen in terms of financial management.
Can you handle it? Of course, you can! And the only rule to follow is this: Shop for lenders.
"There will be a price attached," warns Hira, "which is higher interest."
This gives you all the more reason to be
discriminating when choosing lenders. Don't just jump at the first
credit opportunity thrown your way only to find that the interests are
punishing. Don't get hard-balled into paying for high interest rates
when you can get almost the same loan for lower interest. Compare
lenders. You are the consumer and you still have the advantage of
choice.
Get a Credit Card.
"The best way to establish good credit is to get
a credit card," says Mark Oleson, director of the University of
Missouri Office for Financial Success. "It's ironic because the best
way to help yourself is also the best way to damage yourself."
You usually have two options. You get either a secured card or an unsecured one. Here's how the two are different:
Secured Card
Because they lose nothing by this, credit card
companies are very open to secured cards. However, personal finance
experts are divided on whether or not these cards are helpful to
consumers looking to re-establish credit.
Essentially, a secured card works by depositing
money with the bank in exchange for a charge card. The limit of this
charge card will depend on the amount that you have deposited (it's
usually for the same amount). Thus, when you close the account, you get
your deposit back.
The good thing about secured cards, though, is
that some of them do not report to the credit bureaus that the card is
in fact a secured one. For all the credit bureau knows, you have a
credit card and you've been using it for some time. It will show on
your credit report as a regular credit line without anything explaining
it as a secured card.
However, that is not always the case. So a common
sense advice would be that if all you get is a secured card, be sure to
get the best rates and the least fees. Be sure to read all the fine
print before you sign. And lastly, use the secured card sparingly. Give
it only six months to a year. And afterwards, try to negotiate with the
company for an unsecured card.
Unsecured Card
You may still be able to get a card even after
you have declared bankruptcy. It all depends on lender discretion. Some
lenders and banks may even consider you a good risk since you do not
have any debts on you.
What's more, with bankruptcy, there is a
particular time period where you cannot file for another bankruptcy.
Lenders may take it into good account that you may not be able to file
for bankruptcy for a several years.
However, note that there is a very likely chance
that you are going to pay for this privilege. Again, the standing
advice is: shop around and always, always read the fine print before
signing anything.
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