Filing for bankruptcy is an expensive and painful process, but it’s not the end of the line. There is life after bankruptcy, and it can be better than the life that led you to bankruptcy. Bankruptcy is meant to give you a fresh start, and you can use that fresh start to build a better future.
Once you’ve made it through the bankruptcy process, it’s time to start rebuilding your financial life. We’ll share some things you need to know about how bankruptcy affects your credit and how you can get back on your feet and start anew.
Start By Knowing Your Credit Score
Some bankruptcy attorneys paint a blissful picture of life after bankruptcy: no more bills, no more calls and letters from collection agencies, and a fresh start for you and your finances. Some of that may be true, but negotiating bankruptcy proceedings and rebuilding your credit afterward is no walk in the park.
Bankruptcy can eliminate unsecured debts, but it will not wipe your credit clean.
Chapter 7 bankruptcy means your discharged debts can’t be collected, but each discharged debt will remain on your credit report for years to come. A Chapter 13 bankruptcy is a bit less damaging to your credit score because you will still be making payments on some debts, but it will still leave a hefty negative mark for years to come.
Get Your “Rock Bottom” Credit Score
Your credit score will make a fast track to “rock bottom” after you file for bankruptcy. You need to know what “rock bottom” looks like so you have a starting point to help you begin the rebuilding process.
If you’ve filed for a Chapter 7 bankruptcy, wait 120 days after you receive your discharge letter before checking your credit score. That will assure that your credit report has absorbed the full effect of the bankruptcy filing
Chapter 13 bankruptcies don’t get listed as discharged until the reorganization period is finished. Since this process could take up to five years, you can check your credit score 120 days after the bankruptcy is filed to get your bottom line credit score.
Once you know where your credit score is standing you can begin the credit rebuilding process.
Learn Your Lessons
The first step toward rebuilding your financial life is to understand what led you to bankruptcy in the first place. If your bankruptcy was caused by job loss or an unexpected medical event, there may not be much you can do to avoid a repeat. In many cases, though, bankruptcy is caused by a pattern of spending and borrowing.
If your bankruptcy was caused by overdependence of credit cards, excessive spending, or other financial behavior issues, you’ll have to address those from day 1 of your post-bankruptcy life. You’ll need to make a budget, follow it, and understand what you did wrong and how you can change it.
Begin The Credit Rebuilding Process
Rebuilding your financial life after bankruptcy is possible, but it takes time and consistent effort. Here are some steps you can take to start the rebuilding process.
Budget Wisely And Make Payments Promptly
The first step in rebuilding your credit after bankruptcy is to take control of your finances. Create and use a monthly budget. Include a line item for savings on each budget.
Pay all financial obligations promptly. Pay your mortgage or rent on time. If you have debts that weren’t included in bankruptcy, like student loans, make your payments on time.
Some collection agencies and creditors will harass you for payment even after your bankruptcy filing is complete. Know your rights. You are no longer obligated to pay a debt discharged in your bankruptcy. Report them to the Consumer Financial Protection Bureau if the unwarranted harassment continues.
Beware Of High Interest Loan Offers
Loan companies spend a lot of money on obtaining bankruptcy information. They know they can get away with charging high interest rates to consumers that have recently filed for bankruptcy.
These lenders may say they are doing you a favor by giving you a loan because of your bankruptcy history. Don’t fall for that line. You are an attractive risk to a lot of lenders because you can’t file bankruptcy again for several years. That’s why they are approaching you with offers.
If you absolutely need a loan with a high interest rate you may have to take it. It’s still generally better to pay cash for what you need or wait until you’re further out from your bankruptcy filing before considering borrowing.
Get A Secured Credit Card
One way to start rebuilding your credit is to open a secured credit card. You’ll keep a certain amount on deposit at the bank issuing the card. Your credit limit will be equal to your deposit.
People are rarely denied secured credit cards because there’s no risk of default to the lender. This is because they’ve got your savings balance to offset any default of payment on the credit card balance.
Once you get your secured credit card, use it monthly and pay it off promptly. Paying your balance in full every month will keep you free of interest payments and help you build your credit.
Many credit card issuers will let you convert your secured card to an unsecured card if you establish a good payment history. It’s a great first step back into the world of credit.
Get A Credit Builder Loan
A credit builder loan is another way to rebuild your credit after bankruptcy. Companies like Self offer credit builder loans to those needing to build or rebuild their credit.
The loan proceeds from your approved loan go into a Certificate of Deposit that earns interest. You make affordable monthly payments on the loan, and the loan company reports your payments to credit bureaus. After you pay the loan, you have access to the funds plus any interest you’ve earned.
They may be worth the cost if the loan helps you rebuild your credit score. You’ll also have access to a lump sum of money when you pay the loan. That can help you meet other financial goals.
Maintain A Steady Job and Residence History
Another important part of rebuilding your financial life after bankruptcy is maintaining a steady job and residence history. Avoid changing residences or jobs as much as possible.
After you file bankruptcy, creditors are looking for stability. Keeping the same residence and working for the same company will help. If you have a better job offer, take it, but avoid skipping from job to job.
What to Expect In The First Years After Bankruptcy
You may be wondering what to expect in those first years after your bankruptcy filing is complete. Will you be able to get credit at all? Here are some guidelines that may help.
Getting A Mortgage After Bankruptcy
You probably won’t be able to get a new mortgage or refinance your current mortgage right after bankruptcy. That’s due to strict post-bankruptcy lending rules by mortgage guarantors such as Fannie Mae and Freddie Mac.
You may have to wait as long as four years after a Chapter 7 filing dismissal to get a conventional mortgage loan. FHA and VA loans have shorter waiting periods of two years from dismissal or discharge.
Chapter 13 bankruptcy filers will have to wait two years from discharge and four years from dismissal before getting a Fannie Mae or Freddie Mac loan. Other stipulations may apply as well.
Katie Strom, Minneapolis-based mortgage lending representative for Edina Realty Mortgage, has some tips for those coming out of a bankruptcy and wanting to get a home mortgage loan.
Now is the time to really focus on ensuring you change your financial reputation among creditors. Take the two or four-year waiting period and use it to show things are different.
Build up a healthy savings account balance. Budget wisely each month and save any extra income. Keep debt levels going forward to a minimum.
Show that you’re taking efforts to ensure that the events that led up to the bankruptcy won’t occur again.Katie Strom, Edina Realty Mortgage
Getting approved for a home loan after bankruptcy will take time and effort, but it can be done. Ms. Strom’s advice is a good place to start.
Buying A Car After Bankruptcy
If you’re looking to get a car loan after filing bankruptcy, you can expect to wait at least 6 months. Many auto loan companies will attempt to charge you a high interest rate on a post-bankruptcy auto loan; sometimes 20 percent or higher.
You can avoid paying astronomically high loan rates after bankruptcy. Shop around for the best deals and keep a close eye on your post-bankruptcy credit rating. A cosigner with a solid credit history can get you better terms. Be sure that both you and the cosigner understand the risks and responsibilities.
Better yet, save up and pay cash for a reliable and affordable used car.
Getting A Credit Card After Bankruptcy
Getting a credit card after bankruptcy will usually be easier than getting an auto or mortgage loan. You may be able to get a secured credit card almost immediately, and an unsecured credit card after six months or so.
Getting and using a credit card can help you to rebuild your credit, but only if you use the card wisely and pay off the balance in full every month. If credit card debt was part of what led you to bankruptcy in the first place you’ll want to be sure you don’t repeat those mistakes!
Rebuilding your financial reputation after bankruptcy is possible, but it will take time and effort. You’ll need to understand how you can build credit and how to avoid mistakes that may have helped lead you to bankruptcy. Most of all you’ll need some patience. Credit isn’t built overnight and you’ll have to expect that it will take some time. Many post-bankruptcy restrictions seem inconvenient. They are actually there to protect you from extending yourself too much too soon and getting back into trouble.
If you take advantage of the fresh start that bankruptcy offers and focus on building a new and more sustainable financial life, your bankruptcy could be the start of a new and better financial life!
Do you have any questions about life after bankruptcy? Let us know in the comments section below!