Wednesday, March 11, 2009
All about Bankruptcy
Basic Guide to Bankruptcy
Overwhelmed by debt? Bankruptcy is the means of last resort to rebuilding your financial well-being.
Before you make the decision to file for bankruptcy, consider the following:
Can you accept the immediate consequences of bankruptcy: ruined credit, higher interest rates on new loans and credit cards, higher insurance premiums, difficulty renting a new apartment? Chapter 7 remains on your credit reports for seven to 10 years, Chapter 13 for seven.
Can you avoid bankruptcy by cutting expenses, getting a second job, negotiating with creditors to reduce your interest or payments (see "Make a deal with debt collectors") or setting up a debt-management plan with an agency affiliated with the National Foundation for Credit Counseling? (See "The consumers' guide to credit counseling.")
Doing nothing about your debt is an option only if you're happy being a pauper. If you have assets, your creditors can sue you and take them. Judgments against you last for 10 years and can be renewed for two additional 10-year periods. (See "What if you just ignore your debts?")
Remember, bankruptcy is not a badge of dishonor. Most people who file got in a hole because of divorce, a job loss or medical bills, not because of flagrant overspending. Most people who file have no alternative: Fewer than 5% of those who participate in the credit-counseling session that's required before they can file have any resources to pay off their debts.
Bankruptcy may be your best option if it will take more than five years to pay off your unsecured debt, such as credit cards and medical bills. (See "When bankruptcy is best.") Bankruptcy will not relieve you of secured debt -- where the creditor holds a lien -- like a mortgage or car loans. It also won't end your obligation for most student loans, child support, alimony or recent taxes.
6 tips for a smoother bankruptcy filing
If you decide that bankruptcy is necessary for your emotional and financial well-being, take these steps:
Hire a reputable attorney. The 2005 bankruptcy law increased the amount and complexity of paperwork, including a "means test," needed to file. Beware of bankruptcy mills that charge high fees for botched service. (See "Beware cut-rate bankruptcy advice.")
Get credit counseling from an approved agency within 180 days of filing.
Gather documents. When you meet with the lawyer, you will need pay stubs, deeds, vehicle titles, tax returns and letters from collection agencies, among other paperwork. Your list of creditors must be complete.
Don't run up your credit cards. Bankruptcy courts consider that fraud, and you'll end up having to pay what you owe on the cards.
Don't deposit your money with the banks that issued your credit cards. Banks typically have the right to seize other funds on deposit if a credit card account becomes delinquent.
Use the American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys as resources.
For most people, there are two types of personal bankruptcy:
Chapter 7 requires the sale of nonexempt assets to reduce unsecured debt. The remainder of your unsecured debt will be excused. What's considered exempt varies from state to state. You are allowed to keep your retirement accounts, and most people retain possession of a car and their home if they keep making payments on them.
If your income exceeds the median for your family size in your state (see U.S. Trustee Program) and the means test says it's sufficient to make payments on your debt, you will be directed to file Chapter 13 instead. Under Chapter 13, you keep your property and agree to a three- or five-year repayment plan for some of your debt. If you follow the plan, the remainder of your unsecured debt will be eliminated. Chapter 13 is generally the better option if you've fallen behind on house payments because the plan allows you to catch up.
After you file, an "automatic stay" stops all collection attempts. The stay is temporary for secured debt, so you need to make payments or face repossession or foreclosure. You'll attend a creditors meeting (creditors rarely attend), where a trustee will finalize your case. You'll be required to attend a finance management course.
After you file
Take these steps as soon as possible after you file:
* Start to build your credit score by getting a secured credit card or passport loan. (See "7 steps to take after bankruptcy.") Don't exceed 30% of your available credit each month and pay your balance in full. After a year, apply for a regular credit card.
* Order your credit reports from the three credit bureaus. Make sure the reports say your debts have been "discharged in bankruptcy."
* Obtain an installment loan as a way of rebuilding credit, but be prepared to pay a very high interest rate.
* If you have student loans, try to pay more than the minimum required each month.
* Don't co-sign for a loan. Ever.
* If you intend to keep your car, sign a reaffirmation agreement with your lender.
Manage your finances wisely. Multiple bankruptcies are possible but are disastrous to your credit. You can file under Chapter 7 every eight years and Chapter 13 every two years.
When bankruptcy is best
The decision shouldn't be easy. After all, you're about to nuke both your credit and your credibility. But sometimes the hole you've dug is simply too deep.
The bills are piling up. The collection agencies are calling. At night you lie awake, wondering how you're ever going to cope with your debts.
At what point does it make sense to throw in the towel and file for bankruptcy?
There's no one-size-fits-all answer to that question. In purely financial terms, the answer depends on:
* Your current situation.
* Your future prospects.
* The laws in your state.
There is, of course, another factor to be weighed, which is your personal sense of responsibility for repaying the debt you've incurred. We'll get to that in a moment.
For now, let's explore the purely financial and legal aspects of bankruptcy.
How the process works
A bankruptcy filing halts, at least temporarily, all collection activities, from phone calls demanding payment to more serious actions including foreclosure, wage garnishment and levies against your bank accounts.
What happens next depends on the type of bankruptcy you file:
In the most common type of filing, Chapter 7, your credit card balances, medical bills and most other unsecured debts are erased entirely. (Certain other unsecured debts, like student loans and recent taxes, typically can't be wiped out in bankruptcy.) Technically, some of your property could be taken and sold to satisfy your creditors; the types of property that could be taken vary by state. In some states, for example, only a small amount of home equity is protected from creditors, while in others like Florida and Texas the amount of equity that can be sheltered in a home is virtually unlimited.
In Chapter 13 filings, you're allowed to keep property that might otherwise be used to pay your creditors. In return, you agree to a plan to repay at least some of your debts over the next three to five years. If you complete the plan, the remainder of your eligible unsecured debt is legally erased.
Under 2005 federal bankruptcy reform legislation, you may be required to submit to a "means test" if you file for Chapter 7 and your income exceeds the median for your area. If the means test determines you can afford to repay some of your debt, you'll be shunted into a Chapter 13 repayment plan.
Either way, your credit will be devastated for a while. Bankruptcy is the single worst thing you can do to your credit scores, the three-digit numbers lenders use to gauge your creditworthiness. That means, for a time at least, it will be more difficult and expensive for you to get credit.
Restoring your financial life
But bankruptcy also can give you a fresh start by wiping out old, troublesome debt. Rather than struggling to repay your bills for years or even decades, you can get started rebuilding your financial life. Those who get their act together and begin using credit responsibly often find that they can restore their credit scores to near-prime levels in just a few years. (Read "Bounce back fast after bankruptcy" for more details.)
In fact, the financial benefits of this fresh start are so profound that some experts say we shouldn't be surprised that so many households file for bankruptcy. Rather, we should be amazed the numbers aren't higher.
Back in the late 1990s, when about 1% of U.S. households were filing bankruptcy annually (compared to 1.8% in 2006), University of Michigan researcher Michelle J. White discovered that at least 17% of U.S. households would be better off financially if they filed. The percentage would balloon to nearly half of U.S. households if more people "prepared" for filing, by doing things like maxing out their available credit limits and transferring vulnerable property, like cash in the bank, into bankruptcy-exempt retirement funds.
Relatively few people game the system that way, however. Most arrive in bankruptcy court after exhausting every other avenue they can think of to pay their bills, according to Harvard University professor and bankruptcy expert Elizabeth Warren.
That's borne out by a survey from the National Foundation for Credit Counseling. The organization polled its member agencies, which provide newly mandated counseling to consumers before they file for bankruptcy, and discovered only about 3% of those in pre-filing counseling had the means to repay any of their debt.
The fact that most people don't rush into bankruptcy -- many, if anything, wait too long to file -- doesn't answer the question of whether it's right in your particular circumstance. Because beyond the financial and legal aspects is the fact that you're reneging on debt that you promised to repay.
For some, that reality outweighs any benefit that they might receive from filing. Author Mary Hunt, who dug herself out of more than $100,000 in unsecured debt over 13 years, said she's glad she didn't even consider filing when she hit her financial bottom in the early 1980s. Hunt feels it would have been wrong to bail on her creditors and believes the long, often arduous task of repaying them helped her cure the overspending that got her into financial trouble in the first place.
"I really believe that had I not made that difficult U-turn on the road to total financial ruin -- and the subsequent journey back to solvency, I would have never made the personal life changes necessary," said Hunt, who runs the DebtProofLiving Web site. "Bankruptcy would have been too easy. And knowing myself, I would have been the perfect candidate for a repeat performance."
Making a decision
Others, often with less debt, have come to different conclusions. Sometimes their bills have spiraled so high it would take a lifetime to repay, as is often the case with medical debt when someone who is uninsured gets hit with a serious accident or long illness. Or they see bankruptcy as a purely business decision: the lender made a business choice to extend them credit, after all, with all the risk that entails.
Personally, I have a hard time with people who feel no ethical qualms about filing for bankruptcy. The decision shouldn't be that easy.
Most people in financial crisis have at least some responsibility for their situations. Carrying credit card or other high-rate debt and failing to have a rainy-day fund are two of the common ways people set themselves up for financial failure. Then when life's inevitable setbacks come along -- job loss, divorce, accident, illness -- they're quickly pushed over the edge.
You may not have been entirely responsible for the evils that befell you, but taking responsibility for your part is not only the right thing to do -- it may help you stay out of trouble in the future.
If you use bankruptcy as an easy out and don't fix the problem that led to your debt, you're likely to get right back in the hole. This is especially true if your financial crisis is due to compulsive spending or an untreated addiction -- to drugs, alcohol, gambling, whatever.
If, on the other hand, you're putting off filing solely because of ethical objections, I'd ask you to be realistic about your situation and what it will take to rectify it. The United States outlawed debtor's prisons more than a century ago, and to me it makes little sense to struggle for a lifetime with impossible debt.
In my view:
If, despite your best efforts, it would take more than five years to pay off your credit cards and medical bills, or you would need to use assets that would otherwise be protected in bankruptcy -- like retirement accounts and home equity -- then you should at least consult with a bankruptcy attorney about your options.
I choose the five-year period for a reason: That's as long as a bankruptcy court would require you to stick with a repayment plan under Chapter 13. If you're not sure how long it would take you to pay back what you owe without bankruptcy, consider a consultation with a legitimate credit counselor, one affiliated with the NFCC.
The credit counselor can help determine if your budget just needs an overhaul, if you'd benefit from a debt management plan with your creditors (see "The consumer's guide to credit counseling") or if your finances are beyond the counselor's help.
Ultimately, of course, the decision whether or not to file is in your hands. Whatever any one else says, you're the one who will live with the consequences.7 steps to take after bankruptcy
No matter how devastated and broke you are, you must immediately begin to re-establish your credit rating while avoiding the mistakes that got you in trouble before.
advertisement
Many bankruptcy attorneys like to call a Chapter 7 bankruptcy a "fresh start" bankruptcy. In a way, it is a fresh start -- you do get to eliminate a great deal of debt.
However, the reality of being bankrupt is not fresh at all. "Bankrupt" is a word with a strong negative connotation. It's often unfair, but there is a widespread perception that if you've gone bankrupt, you've done something wrong.
The truth is that you will need to start working immediately to truly have a positive, healthy life after bankruptcy. Follow these seven steps to give yourself a true fresh start:
Reaffirm your car debt.
If you own a car and are still making payments, make sure you sign a reaffirmation agreement with the car lender. A reaffirmation means that you intend to keep the vehicle and continue making payments. If you fail to make payments, your car can be repossessed and sold (with you liable for any deficiency). Signing this agreement is an act of good faith and will give you more leeway with your lender.
Remember: Do not reaffirm the debt if you intend to surrender the vehicle. You will be financially liable for the balance and will not have a car to show for it.
Establish new credit lines.
You need to re-establish credit as soon as possible. Most traditional banks and credit card companies will probably not approve you. However, some banks will allow you to deposit money into a savings account and issue a credit card attached to that account. This is called a secured credit card. Another possibility is a passport loan. This is when you deposit money into a savings account, borrow that money and pay the interest each month.
Neither of these options is great; they are, however, crucial. You see, you will have to do something like this eventually in order to be eligible for a credit card with a traditional bank. Getting started early is far, far better for you in the long term.
Clean up your credit report.
Make sure all three credit bureaus -- Equifax, Experian and TransUnion -- show that your debts have been "discharged in bankruptcy."
This is important because you want the trade lines (accounts) to accurately reflect that they have been eliminated.
Never co-sign for anyone.
If you have just filed for bankruptcy, you will not be able to eliminate debt under Chapter 7 for eight years. Therefore, any co-signed loan that goes bad will very likely result in a judgment against you.
The risk is simply not worth the reward. You may not receive an option to co-sign for a few years after filing, but when the option becomes available, you must avoid it.
Never intentionally carry a credit card balance.
I know, this feels almost impossible. However, in a world where many of us live paycheck to paycheck, the extra money used to pay credit card balances is often the straw that breaks the camel's back. Remember, 85% to 90% of all bankruptcy filers do so because of incurring costs from loss of employment, illness or divorce. If you don't have a balance, should something terrible happen, you will have the financial cushion to help you cope.
It's a tough habit to get into, but paying your balances each month is a great way to save money and provide for yourself in case of emergency. If you are faced with a balance, do everything in your power to stop using the card and pay on the balance until paid off.
More from MSN Money and Bankrate.com
Overwhelmed by bills © Corbis
* The middle-class crunch: How to hang on
* 12 myths about bankruptcy
* Why going broke is a fact of life in America
* 8 ways to consolidate debt
* Why you need $500 in the bank
* 15 must-know credit card terms
Have a story prepared.
Some people are deadbeats. Some people run up their credit cards to support a drug habit. You need to make sure others understand that you are not one of those people, that you have legitimate reasons for filing. You want to have a specific reason -- to be stated in less than 20 seconds -- that says why you filed for bankruptcy.
More often than not, you will find people more willing to work with you when you have been honest, they see in your face your remorse and they understand that your reason for filing was something out of your control.
Stay positive.
Even if you tend to be a negative person, you need to believe that you can get on with life and recover from bankruptcy. I have seen people who are so psychologically devastated after filing bankruptcy that they do not re-establish their credit for years. The result is that it takes them five to 10 years to begin improving their credit score when it only needs to take two years. Please avoid the ostrich approach to life after bankruptcy in which you stick your head in the sand and hope things work out. You must take the aggressive approach, knowing that you will encounter rejection but eventually find success. If you work hard and start immediately, you will soon reach a point where your credit will be strong.
Overwhelmed by debt? Bankruptcy is the means of last resort to rebuilding your financial well-being.
Before you make the decision to file for bankruptcy, consider the following:
Can you accept the immediate consequences of bankruptcy: ruined credit, higher interest rates on new loans and credit cards, higher insurance premiums, difficulty renting a new apartment? Chapter 7 remains on your credit reports for seven to 10 years, Chapter 13 for seven.
Can you avoid bankruptcy by cutting expenses, getting a second job, negotiating with creditors to reduce your interest or payments (see "Make a deal with debt collectors") or setting up a debt-management plan with an agency affiliated with the National Foundation for Credit Counseling? (See "The consumers' guide to credit counseling.")
Doing nothing about your debt is an option only if you're happy being a pauper. If you have assets, your creditors can sue you and take them. Judgments against you last for 10 years and can be renewed for two additional 10-year periods. (See "What if you just ignore your debts?")
Remember, bankruptcy is not a badge of dishonor. Most people who file got in a hole because of divorce, a job loss or medical bills, not because of flagrant overspending. Most people who file have no alternative: Fewer than 5% of those who participate in the credit-counseling session that's required before they can file have any resources to pay off their debts.
Bankruptcy may be your best option if it will take more than five years to pay off your unsecured debt, such as credit cards and medical bills. (See "When bankruptcy is best.") Bankruptcy will not relieve you of secured debt -- where the creditor holds a lien -- like a mortgage or car loans. It also won't end your obligation for most student loans, child support, alimony or recent taxes.
6 tips for a smoother bankruptcy filing
If you decide that bankruptcy is necessary for your emotional and financial well-being, take these steps:
Hire a reputable attorney. The 2005 bankruptcy law increased the amount and complexity of paperwork, including a "means test," needed to file. Beware of bankruptcy mills that charge high fees for botched service. (See "Beware cut-rate bankruptcy advice.")
Get credit counseling from an approved agency within 180 days of filing.
Gather documents. When you meet with the lawyer, you will need pay stubs, deeds, vehicle titles, tax returns and letters from collection agencies, among other paperwork. Your list of creditors must be complete.
Don't run up your credit cards. Bankruptcy courts consider that fraud, and you'll end up having to pay what you owe on the cards.
Don't deposit your money with the banks that issued your credit cards. Banks typically have the right to seize other funds on deposit if a credit card account becomes delinquent.
Use the American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys as resources.
For most people, there are two types of personal bankruptcy:
Chapter 7 requires the sale of nonexempt assets to reduce unsecured debt. The remainder of your unsecured debt will be excused. What's considered exempt varies from state to state. You are allowed to keep your retirement accounts, and most people retain possession of a car and their home if they keep making payments on them.
If your income exceeds the median for your family size in your state (see U.S. Trustee Program) and the means test says it's sufficient to make payments on your debt, you will be directed to file Chapter 13 instead. Under Chapter 13, you keep your property and agree to a three- or five-year repayment plan for some of your debt. If you follow the plan, the remainder of your unsecured debt will be eliminated. Chapter 13 is generally the better option if you've fallen behind on house payments because the plan allows you to catch up.
After you file, an "automatic stay" stops all collection attempts. The stay is temporary for secured debt, so you need to make payments or face repossession or foreclosure. You'll attend a creditors meeting (creditors rarely attend), where a trustee will finalize your case. You'll be required to attend a finance management course.
After you file
Take these steps as soon as possible after you file:
* Start to build your credit score by getting a secured credit card or passport loan. (See "7 steps to take after bankruptcy.") Don't exceed 30% of your available credit each month and pay your balance in full. After a year, apply for a regular credit card.
* Order your credit reports from the three credit bureaus. Make sure the reports say your debts have been "discharged in bankruptcy."
* Obtain an installment loan as a way of rebuilding credit, but be prepared to pay a very high interest rate.
* If you have student loans, try to pay more than the minimum required each month.
* Don't co-sign for a loan. Ever.
* If you intend to keep your car, sign a reaffirmation agreement with your lender.
Manage your finances wisely. Multiple bankruptcies are possible but are disastrous to your credit. You can file under Chapter 7 every eight years and Chapter 13 every two years.
When bankruptcy is best
The decision shouldn't be easy. After all, you're about to nuke both your credit and your credibility. But sometimes the hole you've dug is simply too deep.
The bills are piling up. The collection agencies are calling. At night you lie awake, wondering how you're ever going to cope with your debts.
At what point does it make sense to throw in the towel and file for bankruptcy?
There's no one-size-fits-all answer to that question. In purely financial terms, the answer depends on:
* Your current situation.
* Your future prospects.
* The laws in your state.
There is, of course, another factor to be weighed, which is your personal sense of responsibility for repaying the debt you've incurred. We'll get to that in a moment.
For now, let's explore the purely financial and legal aspects of bankruptcy.
How the process works
A bankruptcy filing halts, at least temporarily, all collection activities, from phone calls demanding payment to more serious actions including foreclosure, wage garnishment and levies against your bank accounts.
What happens next depends on the type of bankruptcy you file:
In the most common type of filing, Chapter 7, your credit card balances, medical bills and most other unsecured debts are erased entirely. (Certain other unsecured debts, like student loans and recent taxes, typically can't be wiped out in bankruptcy.) Technically, some of your property could be taken and sold to satisfy your creditors; the types of property that could be taken vary by state. In some states, for example, only a small amount of home equity is protected from creditors, while in others like Florida and Texas the amount of equity that can be sheltered in a home is virtually unlimited.
In Chapter 13 filings, you're allowed to keep property that might otherwise be used to pay your creditors. In return, you agree to a plan to repay at least some of your debts over the next three to five years. If you complete the plan, the remainder of your eligible unsecured debt is legally erased.
Under 2005 federal bankruptcy reform legislation, you may be required to submit to a "means test" if you file for Chapter 7 and your income exceeds the median for your area. If the means test determines you can afford to repay some of your debt, you'll be shunted into a Chapter 13 repayment plan.
Either way, your credit will be devastated for a while. Bankruptcy is the single worst thing you can do to your credit scores, the three-digit numbers lenders use to gauge your creditworthiness. That means, for a time at least, it will be more difficult and expensive for you to get credit.
Restoring your financial life
But bankruptcy also can give you a fresh start by wiping out old, troublesome debt. Rather than struggling to repay your bills for years or even decades, you can get started rebuilding your financial life. Those who get their act together and begin using credit responsibly often find that they can restore their credit scores to near-prime levels in just a few years. (Read "Bounce back fast after bankruptcy" for more details.)
In fact, the financial benefits of this fresh start are so profound that some experts say we shouldn't be surprised that so many households file for bankruptcy. Rather, we should be amazed the numbers aren't higher.
Back in the late 1990s, when about 1% of U.S. households were filing bankruptcy annually (compared to 1.8% in 2006), University of Michigan researcher Michelle J. White discovered that at least 17% of U.S. households would be better off financially if they filed. The percentage would balloon to nearly half of U.S. households if more people "prepared" for filing, by doing things like maxing out their available credit limits and transferring vulnerable property, like cash in the bank, into bankruptcy-exempt retirement funds.
Relatively few people game the system that way, however. Most arrive in bankruptcy court after exhausting every other avenue they can think of to pay their bills, according to Harvard University professor and bankruptcy expert Elizabeth Warren.
That's borne out by a survey from the National Foundation for Credit Counseling. The organization polled its member agencies, which provide newly mandated counseling to consumers before they file for bankruptcy, and discovered only about 3% of those in pre-filing counseling had the means to repay any of their debt.
The fact that most people don't rush into bankruptcy -- many, if anything, wait too long to file -- doesn't answer the question of whether it's right in your particular circumstance. Because beyond the financial and legal aspects is the fact that you're reneging on debt that you promised to repay.
For some, that reality outweighs any benefit that they might receive from filing. Author Mary Hunt, who dug herself out of more than $100,000 in unsecured debt over 13 years, said she's glad she didn't even consider filing when she hit her financial bottom in the early 1980s. Hunt feels it would have been wrong to bail on her creditors and believes the long, often arduous task of repaying them helped her cure the overspending that got her into financial trouble in the first place.
"I really believe that had I not made that difficult U-turn on the road to total financial ruin -- and the subsequent journey back to solvency, I would have never made the personal life changes necessary," said Hunt, who runs the DebtProofLiving Web site. "Bankruptcy would have been too easy. And knowing myself, I would have been the perfect candidate for a repeat performance."
Making a decision
Others, often with less debt, have come to different conclusions. Sometimes their bills have spiraled so high it would take a lifetime to repay, as is often the case with medical debt when someone who is uninsured gets hit with a serious accident or long illness. Or they see bankruptcy as a purely business decision: the lender made a business choice to extend them credit, after all, with all the risk that entails.
Personally, I have a hard time with people who feel no ethical qualms about filing for bankruptcy. The decision shouldn't be that easy.
Most people in financial crisis have at least some responsibility for their situations. Carrying credit card or other high-rate debt and failing to have a rainy-day fund are two of the common ways people set themselves up for financial failure. Then when life's inevitable setbacks come along -- job loss, divorce, accident, illness -- they're quickly pushed over the edge.
You may not have been entirely responsible for the evils that befell you, but taking responsibility for your part is not only the right thing to do -- it may help you stay out of trouble in the future.
If you use bankruptcy as an easy out and don't fix the problem that led to your debt, you're likely to get right back in the hole. This is especially true if your financial crisis is due to compulsive spending or an untreated addiction -- to drugs, alcohol, gambling, whatever.
If, on the other hand, you're putting off filing solely because of ethical objections, I'd ask you to be realistic about your situation and what it will take to rectify it. The United States outlawed debtor's prisons more than a century ago, and to me it makes little sense to struggle for a lifetime with impossible debt.
In my view:
If, despite your best efforts, it would take more than five years to pay off your credit cards and medical bills, or you would need to use assets that would otherwise be protected in bankruptcy -- like retirement accounts and home equity -- then you should at least consult with a bankruptcy attorney about your options.
I choose the five-year period for a reason: That's as long as a bankruptcy court would require you to stick with a repayment plan under Chapter 13. If you're not sure how long it would take you to pay back what you owe without bankruptcy, consider a consultation with a legitimate credit counselor, one affiliated with the NFCC.
The credit counselor can help determine if your budget just needs an overhaul, if you'd benefit from a debt management plan with your creditors (see "The consumer's guide to credit counseling") or if your finances are beyond the counselor's help.
Ultimately, of course, the decision whether or not to file is in your hands. Whatever any one else says, you're the one who will live with the consequences.7 steps to take after bankruptcy
No matter how devastated and broke you are, you must immediately begin to re-establish your credit rating while avoiding the mistakes that got you in trouble before.
advertisement
Many bankruptcy attorneys like to call a Chapter 7 bankruptcy a "fresh start" bankruptcy. In a way, it is a fresh start -- you do get to eliminate a great deal of debt.
However, the reality of being bankrupt is not fresh at all. "Bankrupt" is a word with a strong negative connotation. It's often unfair, but there is a widespread perception that if you've gone bankrupt, you've done something wrong.
The truth is that you will need to start working immediately to truly have a positive, healthy life after bankruptcy. Follow these seven steps to give yourself a true fresh start:
Reaffirm your car debt.
If you own a car and are still making payments, make sure you sign a reaffirmation agreement with the car lender. A reaffirmation means that you intend to keep the vehicle and continue making payments. If you fail to make payments, your car can be repossessed and sold (with you liable for any deficiency). Signing this agreement is an act of good faith and will give you more leeway with your lender.
Remember: Do not reaffirm the debt if you intend to surrender the vehicle. You will be financially liable for the balance and will not have a car to show for it.
Establish new credit lines.
You need to re-establish credit as soon as possible. Most traditional banks and credit card companies will probably not approve you. However, some banks will allow you to deposit money into a savings account and issue a credit card attached to that account. This is called a secured credit card. Another possibility is a passport loan. This is when you deposit money into a savings account, borrow that money and pay the interest each month.
Neither of these options is great; they are, however, crucial. You see, you will have to do something like this eventually in order to be eligible for a credit card with a traditional bank. Getting started early is far, far better for you in the long term.
Clean up your credit report.
Make sure all three credit bureaus -- Equifax, Experian and TransUnion -- show that your debts have been "discharged in bankruptcy."
This is important because you want the trade lines (accounts) to accurately reflect that they have been eliminated.
Never co-sign for anyone.
If you have just filed for bankruptcy, you will not be able to eliminate debt under Chapter 7 for eight years. Therefore, any co-signed loan that goes bad will very likely result in a judgment against you.
The risk is simply not worth the reward. You may not receive an option to co-sign for a few years after filing, but when the option becomes available, you must avoid it.
Never intentionally carry a credit card balance.
I know, this feels almost impossible. However, in a world where many of us live paycheck to paycheck, the extra money used to pay credit card balances is often the straw that breaks the camel's back. Remember, 85% to 90% of all bankruptcy filers do so because of incurring costs from loss of employment, illness or divorce. If you don't have a balance, should something terrible happen, you will have the financial cushion to help you cope.
It's a tough habit to get into, but paying your balances each month is a great way to save money and provide for yourself in case of emergency. If you are faced with a balance, do everything in your power to stop using the card and pay on the balance until paid off.
More from MSN Money and Bankrate.com
Overwhelmed by bills © Corbis
* The middle-class crunch: How to hang on
* 12 myths about bankruptcy
* Why going broke is a fact of life in America
* 8 ways to consolidate debt
* Why you need $500 in the bank
* 15 must-know credit card terms
Have a story prepared.
Some people are deadbeats. Some people run up their credit cards to support a drug habit. You need to make sure others understand that you are not one of those people, that you have legitimate reasons for filing. You want to have a specific reason -- to be stated in less than 20 seconds -- that says why you filed for bankruptcy.
More often than not, you will find people more willing to work with you when you have been honest, they see in your face your remorse and they understand that your reason for filing was something out of your control.
Stay positive.
Even if you tend to be a negative person, you need to believe that you can get on with life and recover from bankruptcy. I have seen people who are so psychologically devastated after filing bankruptcy that they do not re-establish their credit for years. The result is that it takes them five to 10 years to begin improving their credit score when it only needs to take two years. Please avoid the ostrich approach to life after bankruptcy in which you stick your head in the sand and hope things work out. You must take the aggressive approach, knowing that you will encounter rejection but eventually find success. If you work hard and start immediately, you will soon reach a point where your credit will be strong.
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