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If you’re trying to get back on your feet after a devastating bankruptcy, it might seem overwhelming to think about everything you’re going to need to do to accomplish this objective.
And, you might be worrying yourself sick that an abysmal credit score (one thing that will invariably happen after a bankruptcy) is going to destroy the beautiful plans you have for your future—a future that’s going to require credit to build.
With the blemish of bankruptcy on your credit report, it’s going to be challenging to get a loan. And, anything else that depends on a robust credit history.
Every year, over a million Americans just like you go through the hardship of losing all of their hard-earned financial assets. Most people see bankruptcy as an event so catastrophic that it’s difficult to ever fully to recover from one.
But with a clear plan and a positive attitude, this doesn’t have to be true.
To climb back to being in good graces with the credit bureaus, you need to get rid of all doubt from your mind that you can do this. And then, create a realistic plan that’ll not only pull you out of the financial mire but one that’ll allow you to thrive and be in the best financial health of your entire life.
You’re going to have to be vigilant for the long haul because the financial overlords won’t wipe away a bankruptcy filing from your credit report for 7 to 10 years.
You’re also going to have to surmount some pretty serious obstacles on your way back to financial health.
Two Categories of Bankruptcy Filings
If you’re not a corporation, there are two ways to file for bankruptcy. With a Chapter 13 filing, you agree to pay back some or all of what you owe by restructuring your debt so that it’s more manageable.
Usually, you have five years to do this.
Under a Chapter 7 bankruptcy, your debt will be discharged immediately. However, if you own property, you’ll have to forfeit it. Another requirement is not having enough income to at least pay some of what you owe.
Under current laws, a Chapter 13 bankruptcy will remain on your credit report for up to seven years after the date you file for bankruptcy protection. A Chapter 7 filing will stay on your report for up to 10 years.
If you want to reestablish credit ASAP, then go with a Chapter 13.
Understand the Causes
Sometimes, the events that led to you going bankrupt were totally out of your hands. You might have suffered from a long-term illness, lay-off that wiped out everything you had, or a painful divorce.
But often, the events that led to financial ruin were entirely within your control and not due to outside forces. These are things like poor money habits and bad spending decisions. If this is your story, the first thing you need to do is to understand the root causes of your bankruptcy by looking at your entire financial history.
If you don’t, sooner or later you’ll be right back where you started, and having your financial slate wiped clean will be for naught.
Examine your spending patterns with a critical eye and start thinking of ways you can resist the temptation to overspend. You’ve got to be meticulous about separating things that are fleeting desires you can live without from things that are necessities. Being able to make this distinction will help you to make the choices that’ll keep you financially afloat.
A Clear Plan
Once you understand the habits that got you into trouble, it’s time to formulate a plan of attack.
To seize control of your financial life, you’re going to have to get really good about paying your bills on time. If you consistently pay your bills late, you’re sending the message that you’re financially irresponsible. On-time payments are a big part of your credit history, and they make up 35% of your score.
Late payments make lenders skittish about letting you borrow money. If you want to raise your credit score post-bankruptcy to the maximum possible level, being impeccable about paying your bills on time is a really good way to do it.
Here are some tips to avoid paying your bills late:
- SIGN UP FOR AUTOMATIC PAYMENT: Most recurring bills give you a choice to make payments automatic. If you do this for all your bills, you’ll never have to remember another due date for the rest of your life.
- SET UP AUTOMATIC BILL-PAYING REMINDERS: Quicken lets you set up automatic bill paying reminders when you do your budget. Other financial software has this feature too.
- OPT-IN TO EMAIL REMINDERS: Many companies, such as Citibank, offer this service to their customers as a courtesy. Immediately pay the bill when you receive the reminder, so you don’t forget.
- SCHEDULE TIME: By scheduling time to pay your outstanding debts, you’ll be less likely to miss a payment. And soon, you’ll have developed a positive habit that’ll be yours for life.
- CREATE A DEDICATED BILL-PAYING LOCATION: Find a place in your home where you can do all your bill paying. If it’s at a favorite desk, make sure it has everything you need to take care of your debts, such as internet access, a laptop, stamps, your checkbook, and pens. You’ll also need a file in which you keep your receipts.
- ARRANGE BILLS ACCORDING TO DUE DATE: Get into the habit of writing down the due date of a bill on a calendar as soon as you take it out of the envelope. If you don’t want to do this, you can buy a desk filing system with dated slots.
- MAKE SURE YOUR PAYMENT WILL ARRIVE IN TIME: Check your statement or call your creditor to see when you should send your payment in so it’s not late.
- PAY ONLINE: These days, most companies let customers pay online. When you do this, it immediately gets posted to your account. Plus, you save on stamps.
When you consistently pay your bills when they’re due, this information gets reported to the three credit bureaus. This will help re-establish your credit.
Potential lenders use your credit report to see if you’re creditworthy. The higher your credit score, the more likely they are to arrive at this determination.
Create A Budget
The most important lesson you can learn after a bankruptcy for which you were responsible is learning how to budget your money. You have finite financial resources, and you need to figure out how to best allocate them to pay off financial obligations and buy necessities without running out of money.
Budgeting keeps you from spending too much. It also shows you where all your money is going, which is terrific feedback to have. Budgeting gives you greater financial freedom and less stress.
But to budget, you’re going to have to exert a little discipline over your life. Nobody can make you do it. You’ll always have a limited amount of income, but if you can cultivate some self-control, you’ll be able to remain financially solvent.
There are many ways to budget, so pick a method that you like. You can do it the old-fashioned way with pencil and paper. Or, you can use apps or online platforms, like You Need a Budget. Whichever method you choose, you’re going to first have to list all of your fixed obligations, such as rent and insurance premiums.
Next, add what else you need to spend money on, such as food, gas for your car, and utility expenses. Make sure you have an emergency fund and a savings plan. If you have any automatic deductions such as a 403(b) account and health insurance, add them back in. This’ll give you a more accurate snapshot of your financial health.
If you have money left over, you can add in discretionary spending such as entertainment. Revisit your budget regularly because your needs change over time.
NerdWallet recommends the 50/30/20 plan. This means spending 50% of your income on necessities, limit your wants to 30%, and 20% or more on savings and paying down debt. There are also financial tools you can use to make budgeting easier.
If you follow this plan, your finances will never spiral out of control. And, the icing in the cake is that one day, you’ll be able to retire comfortably.
The Cash Envelope Method
You might want to try to buy everything with cash instead of using credit cards. This is a radical way to get your finances under control, but in order to make it work, you’re going to have to be ruthless in its implementation.
One way of doing this is the cash method system.
This consists of labeling envelopes with your different budget categories. To make things easier, you might want to use different colors. Then, put in the amount of cash that you’ve budgeted for that particular category into that envelope.
Do this every time you get paid. Or, you can do it weekly. It’s up to you. Adhering to this method means that if you go to Safeway and overspend by $5.00, you’re going to have to put something back.
However, it’s impractical to use this system to pay bills online or through the mail. Try to automate payments for fixed expenses. This way, you’re not always running to the bank to put money into your checking account to cover these payments.
To give yourself a little flexibility, have an miscellaneous envelope. This way, if something comes up not covered by the other categories, you’ll have money for it.
Credit for The Newly Bankrupt
Once upon a time, if you were among the newly bankrupt, you wouldn’t be able to get any credit for years. But in today’s world, there are companies out there who specialize in extending credit to those who recently filed for bankruptcy.
These lenders offer secured and unsecured lines of credit. The unsecured lines are usually for small amounts.
These companies are willing to do this because borrowers who filed for bankruptcy have had all their debt erased. So, they’re starting with a clean slate without owing anything, and as a result, have income freed up that they were using to pay down what they owed.
And, the prospective borrower won’t be able to file bankruptcy again for another eight years. Because the borrower doesn’t have much choice, the creditor can charge a high rate.
Because of these two factors, companies might deem these borrowers an acceptable financial risk. You might consider taking them up on their offer if it’ll help you reestablish credit.
Using a Secured Card to Build Credit
A secured card is a quick way to rebuild credit after a bankruptcy. With a secured card, your credit limit is the security deposit you put down as collateral.
For example, if you put down $250, you won’t be able to use your card to spend more than this amount. It works just like a regular card, but there’s no way that the company that issues the card can lose money on you.
If you don’t pay your bill, the company simply takes it out of the security deposit with which you opened the account. But you should be diligent about paying off your balance every month, so you build your credit back up.
Make several purchases every month and then pay off your balance in full. By not carrying a balance, you show the credit bureaus that you can responsibly handle your finances.
Making more than one payment each month can keep your balance low. Having a low balance at all times is recommended because you can never be sure when the credit card company is going to send your information to the credit bureaus, and a large balance reduces your overall credit score.
To make this method effective, make sure that the card history gets reported to at least one of the credit bureaus. It helps to find one with low or no fees, too. If you diligently pay off your monthly statement, you’ll be able to work your way up to an unsecured card in no time.
Finding a Place to Live After Bankruptcy
Although you might be able to get a credit card right after declaring bankruptcy, it’ll be next to impossible to get a mortgage.
As regulations stand right now, you’re going to have to wait at least two years have passed if you filed a Chapter 13 bankruptcy to get a home loan. And if you’ve gone through a Chapter 7, it’s going to be at least four years until you can finance a home.
It could even be tricky to rent an apartment if your prospective landlord runs a credit check on you. But some landlords will listen to what you have to say about the circumstances that led you to going bankrupt. And, why you know it will never happen again.
As I’ve already mentioned, many people file for bankruptcy because of circumstances beyond their control. If something like this happened to you, explain this to your landlord. Even if you were totally responsible for going bankrupt, tell your landlord what you’ve learned about the experience.
If you can show that you paid your rent on time with other apartments you had and didn’t break any leases, then your bankruptcy won’t matter as much in your landlord’s eyes.
If what you say assures him that you’re financially responsible, the might rent the apartment to you—even with a lousy credit history. Landlords also want to look at your employment history and will consider such factors as how many years you’ve been at your current place of employment, whether your job is temporary or permanent, and how much money you currently make.
If your bankruptcy is still pending, the landlord might not want to wait to see what the outcome is. Your landlord will also be looking at the date you filed. He’ll be more likely to rent to you if a significant amount of time has elapsed from the date of the filing to the current date.
If your landlord runs a credit check on you, he’ll be looking to see if you’ve had anything repossessed, if you’ve been evicted, or had late payments on any debts. If it looks like you’re still having trouble being financially responsible, the landlord will probably reject your apartment application.
Remember Where You Put Your Paperwork
Even though you might never want to look at it ever again, keep the notice of your bankruptcy filing in a safe place. That’s because a prospective lender might want to see it before approving your loan request.
Also, a creditor might come out of the woodwork and try to claim you owe them money. Your bankruptcy paperwork can prove to them that you’re not legally responsible for that debt anymore.
Another reason to keep your bankruptcy documents in an easily accessible place is that companies sell off their bad debt to collection agencies. These agencies might not know that you filed for bankruptcy and don’t owe anything.
But sometimes, these agencies are just downright sleazy and will use any means at their disposal to get the money they think they’re due. Usually, your bankruptcy filing paperwork will be enough to get them out of your hair forever.
Establish a Relationship with Your Bank
Developing a personal relationship with local lenders will help you to get credit sooner rather than later. Get to know the loan officers and even the CEO of a bank or a credit union in your area.
Tell them why you had to file for bankruptcy and the lessons you learned from it. This way, you’ll reassure them that you won’t get into dire financial straits again and you’ll be more likely to get a loan for a car or a mortgage.
Sometimes, people go bankrupt due to a devastating life event. Other times, it’s due to poor financial choices.
If you fall into this latter category, you need to embrace the lessons bankruptcy has to offer you. But don’t be too hard on yourself. Even the best of us make mistakes. How you rebound from them is the important thing.
If you follow the strategies in this article, you’ll be financially on your feet before you know it. And, with a credit score you can be proud of.
Furthermore, you’ll be a paragon of fiscal responsibility with your finances in the best shape they’ve ever been in. With the insights you’ve gained through this experience, you’ll be able to teach others how to crawl out from underneath a mountain of crushing debt.
You’ve taken an unfortunate event in your life and turned it into something useful. And after all, isn’t that what life’s about?
So, stand tall, walk confidently out into the world, and determine never to repeat the mistakes that led you to bankruptcy court.
That’s all you need to do.