Life After Bankruptcy: 5 Steps to Rebuilding Your Credit, Finances and Emotions
But if you've recently filed for Chapter 7 or Chapter 13 bankruptcy protection, it's important to realize that there is life after bankruptcy. And it doesn't have to be a life where you're treated like a financial outcast and banished to years of credit exile.
On the contrary, life after bankruptcy can be enormously rewarding – but only for those who strategize properly and commit themselves to not wasting the second chance that bankruptcy can offer. Ultimately, how well you rebound from a bankruptcy filing depends on the post-bankruptcy steps you take to safeguard yourself against future financial calamities.Here are five steps to speed up your recovery after bankruptcy – and help you get on with the business of living life well without the stigma of the bankruptcy process.
Let Go of the Guilt and Shame
If you've gone through bankruptcy – or are contemplating it – you're certainly not alone. In 2010, personal bankruptcies in the U.S. rose by 9% to 1.53 million filings. Also, a May 2011 survey from FindLaw.com revealed that one in eight adults in the U.S. – 13% of the population – admit they've considered bankruptcy. These sobering statistics are telltale signs that many Americans are still battling the lingering affects of the Great Recession.
Nevertheless, people who've filed for bankruptcy protection are often wracked by guilt and shame. It's not uncommon for bankruptcy filers to say things like "I feel like a failure" or "I'm so disappointed in myself."
But beating yourself up about your predicament won't make your situation any better. In fact, succumbing to a steady stream of negative emotions about your bankruptcy can even be harmful to you by preventing you from moving forward in a positive way.
A better strategy: Resolve to make peace with the past by letting it go, and don't dwell on negative thoughts or wallow in self-pity.
"Sometimes things just happen," says James Feazell, who has counseled scores of financially challenged consumers over the years in his role as vice president of education at the National Foundation for Debt Management in Clearwater, Fla.
Feazell notes that job loss, divorce, medical bills and other personal setbacks can drive people into excessive debt and force them to declare bankruptcy. "So the challenge now is to adopt the right attitude," says Feazell. "You have to get yourself mentally back in the right place where you can become more disciplined and better educated, and where you can learn from life and not make the same mistakes."
Reflect and Regroup
How do you get to a healthier place emotionally if you're disappointed about the past and perhaps experiencing regrets about choices you made?
Once the dust has settled after your bankruptcy, do some soul searching, recommends Chris Bridges, owner of Vision Credit Services LLC in the Washington D.C. metropolitan area.
"You really need to ask yourself several key questions," Bridges says, "including 'How did I get here? What could I have done differently? And what have I learned from all of this?' " Your answers will help you create a better financial afterlife in the wake of bankruptcy.
Additionally, enlist a great support system, Feazell suggests. "Friends, family, your church or members of civic organizations can all provide you with an emotional charge when you need it, or even just a shoulder to lean on," he says.
It's important to have the right people around you, Feazell adds, because "positive people who are in your corner, telling you that you can overcome this, can help you deal with all the bumps, plateaus and valleys you may experience after bankruptcy."
Create a Realistic Budget and Pay All Your Existing Bills on Time
After a bankruptcy, you must become extra vigilant about your finances. Even if you've never created – or stuck to – a budget in the past, now is the time to get serious about doing so. Your budget will act as your spending plan, helping you to manage cash flow and preventing you from racking up unnecessary debt.
"Understanding your budget means you try to live below your means and stop keeping up with the Joneses," says Dawn Brown, a certified financial planner and senior financial advisor with Altfest Personal Wealth Management in New York City. "Your budget should also have a line for saving, so you can pay yourself first."
Brown and other experts say having an emergency fund is vital to deal with future emergencies or unexpected events that can derail even the best of budgets.
Also, make it a priority to pay all your current bills in a timely manner. Set up automatic bill payments, and remember to pay your rent on time since rent payments are now being tracked by the credit bureau Experian and will affect your credit score.
Repaying your existing bills as agreed will be one of the single, most powerful things you can do to restore your finances and your credit, according to Bridges, who has also written the free e-book Your First Step to Credit Restoration.
If you can't pay everything that's due, says Bill Hardekopf, CEO of LowCards.com, "prioritize your expenses. Pay the ones necessary for survival first, such as food, housing and utilities. This also helps protect your credit score, because a missed mortgage payment can hurt your credit score."
Pick a Credit Card That Will Help You Rebuild Credit
Experts agree that another key strategy to rebuilding your credit rating after bankruptcy is to obtain a secured credit card. With a secured card, you deposit a given amount of money, such as $500, into a bank account and that $500 becomes your credit limit. By charging small amounts each month and repaying your debts as agreed, you can gradually rebuild your credit.
"Some of these (secured) cards will reward responsible borrowers by upping the limit without an additional deposit," Bridges says. "Some will even convert the account into a traditional credit card."
A few caveats about secured cards: First, recognize that at some banks, not everyone qualifies for a secured card, particularly if your bankruptcy is less than a year old. Also, stay away from secured cards that charge high fees, that don't report your payment history to the credit bureaus, or that ask you to call a 900 number (you'll be charged for the call).
Separate Fact From Fiction About Bankruptcy
Bankruptcy filers are often force-fed a host of myths and misconceptions about how horrible their lives will be in the wake of a bankruptcy proceeding. While life after bankruptcy certainly won't be a cakewalk, unfortunately, much of the information doled out is flat out wrong, according to credit experts as well as people who've successfully and quickly bounced back from a bankruptcy filing.
First, there's the incorrect notion that bankruptcy will automatically disqualify you from getting a mortgage for at least 10 years. Wrong! You can actually be in the middle of a Chapter 13 bankruptcy proceeding and still get an FHA home loan.
There's also the false assertion that getting a credit card will be next to impossible for at least seven years. But this is untrue as well: Most bankruptcy filers receive a slew of credit card offers from banks almost immediately after their bankruptcy is discharged. One study showed that 96% of consumers were offered new credit within a year of declaring bankruptcy.
And then there's the wrong-headed idea that car dealers and lenders will only approve your application at sky-high interest rates. Not so. As many people who've gone through bankruptcy will attest, there are numerous auto companies and lenders willing to finance a vehicle or approve loans at reasonable rates after a bankruptcy.
And while it's true that bankruptcy will remain on your credit report for up to 10 years, it's definitely not the case that it will take a decade to re-establish a positive credit rating. In fact, many people's worst credit problems – even bankruptcy – are often not as bad as they think.
"Because credit scoring models typically lend more weight to your recent activity than to the mistakes you've made in the past, you can change your habits right now and begin reestablishing yourself as a good credit risk for a purchase or refinance loan in just six to 12 months," says Bridges, who offers free credit report consultations to consumers.
FICO credit scores range from 300 to 850 points. Roughly six months after a bankruptcy is discharged, Bridges notes, "it's not uncommon for people to see their credit scores skyrocket up into the 700s, if they have absolutely no late payments or collections" following the bankruptcy.
On the other hand, says Bridges, "if you do have a late payment or a collection following bankruptcy, you get dinged double by the credit scoring system, because it's like: Didn't you learn your lesson?"