Life After Bankruptcy

What does life after bankruptcy look like? When you're considering this move, it's important to look ahead before you decide your next steps.

People can find themselves at a point where there is no chance they will be able to pay off the debts they have accumulated. For example, consider someone who has depleted all their savings and maxed out all of their credit cards due to medical problems and losing their job. Even with unemployment or a temp job, they might find that they can no longer make even the minimum monthly payments on their cards or keep up with their rent and car loan. That's when a helpful option is talking to a bankruptcy attorney. Chapter 7 could turn out to be the logical next move.

Unfortunately, this situation is all too common—in fact, Mark Twain, Walt Disney, Elton John, and Henry Ford 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 individuals who have declared bankruptcy, the recovery process is long and difficult. The first step comes when you and your court-appointed bankruptcy trustee meet with your creditors to inform them of the bankruptcy, at which time any nonexempt assets that you have must be liquidated. You will be allowed to keep your furniture, car, and personal belongings up to a certain value, but any nonexempt liquid assets, such as cash or certificates of deposit (CDs), must be turned over to your trustee. However, liquidating your assets is only the first of many issues that must be dealt with as the consequences of your bankruptcy unfold.

Getting a loan of any kind will be extremely difficult for the next couple of years. It may be possible to regain a better credit score and qualify for some types of loans after only a year, but the lenders that will take you on 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.

A Chapter 7 bankruptcy will remain on your credit report for 10 years. If you file a Chapter 13 bankruptcy instead, the bankruptcy should disappear from your credit report after only seven years. With Chapter 7 your trustee uses the liquidated assets to pay off as much of your debt as possible, after which the rest is discharged. Chapter 13 requires that you pay back all of your debt within three to five years according to a set payment plan that must be approved by the court. If you are in a position to put forward a credible plan, Chapter 13 is often preferable, because it allows you to save your home from foreclosure.

Ultimately, there are six types of bankruptcy filings. To choose the one that best suits your financial position, it is advisable to consult with a lawyer.

How to Recover After Filing for Bankruptcy

Here are a few steps that you can take to help regain control of your situation.

Maintain a job and a home

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. Stable residential and employment histories are necessary because they show creditors that you are reliable.

A growing number of landlords are checking credit references as a means of screening out possible unreliable tenants. If you are not able to rent an apartment, you may have to room with a friend or relative until your credit improves.

Employers may also request credit scores and histories of their potential applicants as a measure of personal responsibility. A spell 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. Do what you can to push forward anyway and find a job that can be the foundation of putting the bankruptcy behind you.

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. There is absolutely no room for even the tiniest amount of backsliding in this regard. This means that you must be extremely watchful of every expenditure so that your expenses don't build beyond what you can afford to cover.

Keep a bank balance

Opening and maintaining a checking and/or savings account is also necessary. Having a history of charged-off bank accounts could hinder your ability to open a new checking account.

The good news is that many banks offer second-chance programs 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’s important to start to build up what got torn down. To rebuild your credit you may need to obtain a credit card. Using it wisely will demonstrate to lenders that you can manage your money and are determined to slowly rebuild your flawed credit history.

If you find yourself racking up debt again, you should stop using your card immediately and start a repayment plan. If necessary, use a debit card or prepaid credit card until you can pay off your regular card. Keep in mind that the interest rate on any card for which you are eligible will likely be higher than on the average credit card.

Find help for car loans and mortgages

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, cosign 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 cosigner. If credit is not available, 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.

Also an issue if you're buying a car: After declaring bankruptcy, you may find that insurance companies are reluctant or unwilling to insure you. If your past credit history puts you in what insurers consider a high risk pool, there are companies that will provide car insurance for you—charging more, but you still need it to drive.

The Bottom Line

Although the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 made it more difficult for Americans to declare bankruptcy, the the need to take this step continues. As the pandemic unfolds, there will likely be more individuals and families going through bankruptcy.

Using your post-bankruptcy income and credit wisely is the key to 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, Elton John, and Henry Ford all went on to have prosperous futures—and if they could put their bankruptcy behind them, so can you.