Bankruptcy is a heavy blow, a burden on your back, a festering wound that will stigmatize you for years. People talk about you with low voices. Only time’s passage can alleviate the burden for the average person, an epoch that lasts up to 10 years. Then there’s Donald Trump. The Presidential Candidate, qualified not by political experience but, he says, by his business acumen, his no-nonsense, stream-of-consciousness rhetoric and that multi-billion-dollar bank account that grows faster than a rubber tree plant (as the song says), and he’ll threaten to sue anyone who claims it’s less. He says it’s $10 billion, various sources say it’s $2.6, or $4.7. No matter; Trump’s filed four times – count ‘em: four! – not personally, but for companies he owns, most recently in 2009 for Trump Entertainment Resorts. And now he’s a Presidential Candidate! Yet each time his business ego has emerged from bankruptcy not only quickly, but louder than ever.
You cower, Trump glows. Yet post bankruptcy, it’s possible to qualify for a loan or a mortgage in 24 months – without resorting to a fake tan. How do you recover from bankruptcy like The Donald, without resorting to a fake tan?
Face Up To The Situation
Patience: It’s a virtue. The sad fact is, a Chapter 7 Bankruptcy takes a decade to leave your credit report, while it’s a mere 7 years for Chapter 13. What’s the difference? Chapter 7, which comprises 70% of bankruptcies, discharges medical bills, credit cards, liability for judgments (which stops wage garnishment) and mortgages (which prevents deficiency lawsuits), allows leases to be broken, and lets you surrender your home or car without further liability. In Chapter 13, the court allows a plan to repay all or part of your debts over three to five years, and even stop foreclosures – if you can make all mortgage payments on time during the life of the plan.
Let’s say you have an itch for a mortgage before the seven years. Fear not! With a steady income it’s possible to take out certain kinds of mortgages as soon as 24 months after filing Chapter 7 – or maybe even sooner if you've filed a Chapter 13. That’s almost like having a bankruptcy-free record. (If it’s less than 24 months, you’re usually going to pay higher interest rates.) Home loans are available from the Federal Housing Administration, with a low, low down payment of about 3.5 percent, and a credit score in the 500 range. However, an FHA mortgage comes with an insurance premium that increases the monthly payment. (Check out Understanding FHA Home Loans.)
What Steps To Take (Or Not)
• Skip debt settlement firms. First, they’re slower than slug meat. If you’re looking to add between nine months and a year to this bankruptcy mess, they can do it. Settlement firms only promise to negotiate with your creditors, and there’s no assurance that your debt will be wiped clean. The settlers also know that you’re short of cash, if you have any, so they tell you to start saving it, which is easy if you don’t pay your debts, which they advise you to do. Without any legal protection – because settlement firms can’t offer it – creditors can garnish, harass, foreclose and file lawsuits.
• No, Chapter 7 ain’t cheap. Expect to fork over a minimum of $1,800 plus lawyer fees to file, but that’s much less than you’d pay a debt settlement firm. Meanwhile Chapter 7 is fast and effective. You see the lawyer, and fill out a form, and at that moment creditors must stop the bills and calls. Within a few weeks you’ll appear for a few minutes before a federal judge, and with the bang of a gavel your debts are discharged. You get to start over.
• Now, circle the wagons around your credit score! Quick review: A credit score can range from 300 (for a human comparison, think Bernie Maddoff today) to 850 (that’s more like President-select Trump). The median score (April 2014) is 711, and “deep subprime” is 550 and below. The effect of bankruptcy: a shiny 780 before will plunge to somewhere between 540 and 560 after. A more typical pre-bankruptcy score of 680 will end up between 500 and 530. So, as far as your score goes, get it, learn it, work it. The three reporting agencies will give you a free report once a year, and at creditkarma.com a credit report is free all the time. Make sure it’s accurate, complain to the reporting agency if it’s not, and then enact a plan to pump it up. (For more on credit, see Why CreditKarma Is Free & How It Makes Money and 5 Keys To Unlocking A Better Credit Score.)
• Begin anew, bank-account-wise. Open a new checking and savings account, and get a new lease on banking life. Then to ensure that your bills are paid on time – which credit-scorers love – sign up for automatic online bill payment.
• Get a credit card. Seriously. Shirking credit is perfectly understandable, even a knee-jerk reaction, but it doesn’t help, and avoiding credit won’t improve your credit score. Select a card with the lowest interest rate (usually 15 percent) and annual fee ($30 isn’t bad) and pay it in full every month. Within a year your score shoots up 50 to 75 points. See, future creditors! You’re not a risk!
• Also, get gas and store cards. They improve credit too, and if you have to spend money on gas anyway, make the money work for you. Here’s a good thing: the issuers don’t require good credit – in fact, they market such cards to credit risks. Of course, still pay it in full every month.
ª For any loans you may have left – Chapter 7 doesn’t absolve you of student loans, for instance – make a religious commitment to repay them. Make the payments on time, and throw in a couple of bucks more if you can.
• Clean up your budget. While you're feeling bad about yourself is a good time to do it. Strip out luxuries, impulse buys, Friday surf-and-turf dinner, Summer Clown School for your precocious kids. Well drinks instead of top shelf. Have you seen how expensive cigarettes are? A leaner lifestyle will help you return to financial health and renewed self-respect.
The Bottom Line
Free your mind, or think like a board of directors. Or Donald Trump. The U.S. has just gone through a years-long financial crapfest, the economic equivalent of the Vietnam War. In 2013, according to Government statistics, 1,107,699 individuals and businesses filed for bankruptcy. See, you’re far from alone, so don’t let emotions rule you. Don’t forget: the business world treats bankruptcy like a tool. They don’t necessarily love it, except maybe Trump, but it’s great to have around. You can trust your creditors to use every available technique to collect, even those on the border or legality – like harassing phone calls. Treat your life like a business, and you’re the businessman. And be patient. Like your credit, Rome wasn’t rebuilt in a day.