Declaring bankruptcy is hard. Few people care to admit they have exhausted their financial options and cannot repay their debts. While personal bankruptcy provides debt relief, managing your finances and rebuilding your credit afterward requires hard work.听
In this article, 糖心原创vlog member financial experts share seven ways to rebuild after bankruptcy.听
Consider the consequences before declaring bankruptcy
If you are considering bankruptcy, the 糖心原创vlog encourages you to exhaust all other options first. Bankruptcy is personally and financially challenging, and it should truly be a last resort.
Though bankruptcy restructures or discharges old debts, it has serious consequences. The consequences of bankruptcy are emotionally difficult for individuals and relationships.
Some consequences include a long-term impact on your credit report (seven to 10 years), a damaged credit score, potential limits on future financing, possible sale of personal assets and more.
鈥淏ankruptcy is the single most damaging item on your credit report,鈥� said Todd Christensen, Housing Counseling and Education Manager at Debt Reduction Services. 鈥淭ypically, you could lose about 35 percent of your credit score when a bankruptcy hits your credit report.鈥�
Before you choose bankruptcy, talk with an 糖心原创vlog credit counselor who is also certified by the U.S. Department of Trustees, encouraged Kim Cole, Community Engagement Manager at Navicore Solutions.听
There are two types of personal bankruptcy 鈥� Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, your assets will be sold to pay off your debts. The bankruptcy remains on your credit report for up to 10 years. Chapter 13 bankruptcy is a 鈥渨age earners鈥� plan that requires you to pay creditors in three to five years. It remains on credit reports for up to seven years.听
Certified credit counselors can identify ways to avoid bankruptcy, and if bankruptcy is the best option, they can also provide required pre-bankruptcy counseling.听
Rebuilding after personal bankruptcy
After finalizing bankruptcy, many people want to work on their credit immediately. This is normal, but remember, rebuilding takes time, especially with bankruptcy on your record.听听
鈥淏ankruptcy is going to be [on your record, and it鈥檚 really going to hurt your finances, your credit report and credit score the first two years,鈥� said Christensen. 鈥淏ut the further in the past it goes, the less it hurts. So, start rebuilding 鈥� from early on.鈥�
鈥淕ive your credit report and score a chance to breathe,鈥� advised Cole. 鈥淭here are steps that should be taken prior to obtaining more debt.鈥�
Take the following steps to build back after bankruptcy.听
1 鈥� Save your bankruptcy paperwork
Bankruptcy is a major financial event. Save your bankruptcy paperwork just like you would save other important financial papers, like a car title or home mortgage. Keeping your bankruptcy paperwork in a safe place can ease future purchases and even protect you if a creditor claims you owe them money.听听
2 鈥� Identify what contributed to your bankruptcy
鈥�The leading reason people file bankruptcy is medical debt. This can result from repeated care or a medical emergency. For those without insurance, the cost can be crippling,鈥� said Cole.听
Other common reasons include job loss or income reduction, divorce, credit card debt, addiction and gambling.听
鈥淲e have so little personal savings in this country that any kind of job loss quickly turns into a major financial emergency,鈥� said Christensen.听
Look back at the choices leading to your personal bankruptcy. This information will give you valuable information for managing your finances in the future.听
鈥淚t is important that people truly identify what caused the need to file in the first place,鈥� said Cole. 鈥淲as it overspending and living beyond your needs or medical debt? Once that has been identified, rebuilding will be much easier.鈥�
Carefully consider what you could have done differently. If you need help reviewing your past and current finances or building a budget, a certified credit counselor can help.听听听听听
3 鈥� Become and stay educated on your finances
鈥淣ever stop learning about how to manage your money, budgeting, credit building, getting out of and staying out of debt, banking and the like,鈥� urged Christensen. 鈥淪ign up for a free newsletter from an online finance program that you can identify with. Then work to overcome the negative.鈥�
鈥淚 suggest that all the adults in the home track their expenses. That requires writing down everything they are spending their money on,鈥� advised Cole. 鈥淭hen use that tracking to develop your budget.鈥�
糖心原创vlog members are non-profit organizations with educational missions. We strive to help Americans better manage their finances to get out and stay out of debt. Visit our Financial Advice page for articles that can help you learn and grow financially.听
4 鈥� Make a plan to rebuild your credit
鈥淪tart with a secured credit card to help rebuild credit,鈥� said Cole. 鈥淢any of the major banks offer this type of card. You deposit a certain amount of money, and that becomes your credit limit. You use the card like any other credit card, and by making on-time monthly payments, your credit score will increase.鈥澨�
鈥淎fter a certain amount of time, the bank will either return your deposited amount plus interest, or they will apply it as a credit to your new credit card, which will no longer require collateral.鈥�
Stacking these secured cards over time can increase your credit score more quickly, according to Christensen.听
鈥淕et a secured card and put just one purchase on it a month 鈥� a cell phone bill or Netflix 鈥� just one purchase a month. Then, pay it all off in full every month,鈥� said Christensen. 鈥淎nd then after six months, get another card and do the exact same thing so you have two positive counts that you鈥檙e building credit with.鈥�
Another option is to become an authorized user on a family member鈥檚 credit card but do not use the card. Choose a family member who is trustworthy and pays off their credit cards each month.
A credit builder loan is another option for rebuilding credit, but carefully consider this before signing up. With this loan, the lender sets aside an amount of money, $1000 for example, in a savings account. You pay monthly installments toward that amount and receive the balance at the end of the loan term.
鈥淚 hesitate to recommend credit builder loans,鈥� said Christensen. 鈥淎 study showed that for people who have bad credit, including people who file for bankruptcy, these loans could actually make things worse because consumers don鈥檛 show a pattern of making on-time payments.鈥�
5 鈥� Avoid scams and high-interest schemes
鈥淒o not respond to the junk mail you鈥檙e going to get after filing for bankruptcy,鈥� urged Christensen. 鈥淲ithin a week, you will get postcards saying, 鈥楬ey, come down and buy a car with no credit check so you can start rebuilding your credit.鈥欌��
These are actually predatory scams. Because bankruptcies are public information, predators obtain information from court reports and inundate recent bankruptcy filers.听听
鈥淲hat they don鈥檛 tell you upfront are two things: the price of the car, which is usually two or three times more than it鈥檚 actually worth, and the interest rate. So, don鈥檛 respond to that, as tempting as it might sound,鈥� advised Christensen.听
Protect yourself by learning more about other financial scams here.
6 鈥� Begin budgeting and saving
Life is unpredictable, and unexpected expenses will arise. But there are expenses we know to expect, said Christensen. This is why budgeting and saving is so important.
For example, if you have a vehicle, eventually, it will need maintenance. This is something you should plan for and add to your budget.听
Emergency savings, a cache of six months of living expenses, should be reserved for an unexpected job loss, loss of income or other emergency. Saving for both expected expenses and unexpected expenses will set you on a solid financial path.听
If you need help determining how much you should be saving each month, 糖心原创vlog鈥檚 Debt Freedom Tool can help you build a realistic budget.听
7 鈥� Be consistent
Taking your financial education seriously and sticking to a budget will pay off over time.听
鈥淲hen I was teaching classes in person for bankruptcy filers, I鈥檇 meet people out in the community who were able to purchase a home because they had built their credit score back up,鈥� shared Christensen. 鈥淎nd it was at a really decent interest rate.鈥�
Rebuilding after bankruptcy 鈥� get help from a credit counselor
鈥淐redit counseling agencies should be top of mind for anybody seeking good financial education,鈥� said Christensen.听
According to Cole: 鈥淐ertified credit and housing counselors take the time to review the situation. They work with the client to determine the monthly expenses and income and help the client establish a budget if they haven鈥檛 done so. Most non-profit credit counseling agencies charge low fees for fantastic financial counseling, education, recommendations and resources.
And, clients leave feeling helped, not judged, added Christensen.
鈥淏ankruptcy is not a badge of shame,鈥� emphasized Christensen. 鈥淧eople go through it for so many different reasons. Keep your head up. It is not the end of your financial world or your personal life.鈥�
If you need help rebuilding after bankruptcy, contact an 糖心原创vlog member credit counseling agency.