Valerie looked at the pile of bills on her desk and sighed. She realized that at this point, there was no chance that she would be able to pay off the debts that she had accumulated over the last few years. Between her medical problems and losing her job, she had depleted all of her savings and maxed out all of her credit cards, and could no longer even make the minimum monthly payments on them. Her rent and car loan were past due, and the temporary job that she was working would hardly cover her current expenses. She pushes the bills to the side and decides to talk to a bankruptcy attorney about her situation. One week later, Valerie finds herself filling out the Chapter 7 paperwork.
Unfortunately, Valerie's situation is all too common - in fact, Mark Twain, Walt Disney, Donald Trump and Henry J. Heinz all filed for bankruptcy at some point in their lives. If you think bankruptcy could be looming for you as well, read on to discover what you can expect and what to watch out for after filing for personal bankruptcy.
You've Filed - Now What?
For the individuals who have declared bankruptcy, the recovery process is long and difficult. The first step comes when you and your bankruptcy trustee meet with your creditors to inform them of the bankruptcy, at which time any non-exempt assets that you have must be liquidated. (To see a full list of asset exemptions, check out DaveRamsey.com.) You will be allowed to keep your furniture, your car and your personal belongings up to a certain value, but any non-exempt liquid assets such as cash or certificates of deposit (CDs) must be turned over to a court-appointed trustee. But liquidating your assets is only the first of many issues that must be dealt with as the consequences of your bankruptcy begin to unfold. (To learn more about assets and the actual bankruptcy process, see What You Need To Know About Bankruptcy.)
Getting a loan of any kind will be extremely difficult for the next couple years, although it is possible to regain a better score and even some types of loans after only a year. However, the lenders that will finance you will probably be from finance companies that charge exorbitant rates of interest. In some cases, it may not be possible to get credit at all for major purchases, such as a car or home. These issues will remain for the next 10 years under a Chapter 7 bankruptcy. If you file a Chapter 13 bankruptcy instead, this kind of bankruptcy will often disappear from your credit report after only seven years. However, this type of bankruptcy also requires that you pay back all of your debt within three to five years according to a set payment plan. Because there are six types of bankruptcy filings, it is important to contact your lawyer to make that you file the one that best suits your financial position.
Take Back Control
Here are a few steps that you can take to help regain control of your situation:
- Maintain a Job: It is vitally important that you get - and keep - a job as soon as possible, if you don't have one already. Finding a good place to live ranks a close second, if this is an issue as well. A stable residential and employment history is necessary because it shows creditors that you are reliable. Unfortunately, a growing number of landlords are starting to check credit references as a means of screening out possible unreliable tenants. If you are not able to rent an apartment to your liking, then you may have to room with a friend or relative until your credit improves. Furthermore, employers may also request credit scores and histories of their potential applicants as a measure of personal responsibility. Therefore, a little bit of bad luck can fuel a vicious cycle that may prevent you from getting a job that pays enough for you to pay off your debts. (To read more about finding housing after filing, check out RentAfterBankruptcy.com.)
- Pay Your Bills: It is imperative that you stay current on all of your monthly bills and other payments so that your post-bankruptcy credit record stays clean.
- Keep a Bank Balance: Opening and maintaining a checking and/or savings account is also necessary. But more banks and insurance companies are evaluating their customers' credit records before taking on their business. After declaring bankruptcy, insurance companies may feel that you are at risk of being unable to pay your premiums, just like having a history of charged-off bank accounts could hinder your ability to open a new checking account. Fortunately, many banks offer some sort of second-chance program for people in this situation. Keeping a positive balance in all accounts at all times will show employers and creditors that you now have a reliable cash flow.
- Start to Rebuild your Credit: During bankruptcy, it is important to start to build up what you so quickly tore down. To rebuild your credit you may need to obtain a credit card. If you learn how to use it wisely it will demonstrate to lenders that you can manage your money and that you are determined to slowly rebuild your flawed credit history. This is only a viable option if you can control the credit and not let it control you. If you find yourself racking up debt again, you should cancel your card immediately and start a repayment plan. Fixing your credit rating is a good thing only when you can handle the credit itself. Keep in mind that the interest rate on any card you are eligible for will likely be higher than the average credit card. When the time comes to buy something larger with debt (such as a car or house), you may need to have another party, such as your parents, co-sign the loan. Without this, you may not be able to obtain financing at all; with it, you may be able to get something resembling decent terms on your loan (depending on the credit score of the co-signer). However, if credit is not available, then you may simply have to wait until you can pay for a car with cash or consider a personal loan from your relatives and/or friends.
Although recent legislation has made it more difficult for Americans to declare bankruptcy, bankruptcy is still far too common. Using your post-bankruptcy income and credit wisely is the key toward rebuilding your rating and standing on your own two financial feet again. If you can prove to lenders and employers that your post-bankruptcy life is in order, then this obstacle, too, will pass. Remember, Mark Twain, Walt Disney, Donald Trump and Henry J. Heinz all went on to have prosperous futures - and if you can put your bankruptcy behind you, so can you.