Managing Debt

6 Steps to Recovering from Bankruptcy

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The decision to file bankruptcy is not an easy one. Society has taught us that bankruptcy is the worst thing you can do to your credit and will haunt you for the rest of your life. This is absolutely not true. While bankruptcy does negatively impact your credit, it can be a blessing in disguise for those with insurmountable debt. Unfortunately, with the negative state of our economy bankruptcy will become more commonplace. If you are like other Americans who have chosen to file bankruptcy, you need to know that you CAN recover financially from bankruptcy and it will not take a decade to do it.

Perform a self-evaluation. Post-bankruptcy, you may be feeling hopeless and in despair. You may be dealing with a lot of negative emotions. Instead of indulging these emotions, you need to ask yourself what led you to file bankruptcy? Certainly, some circumstances may have been beyond your control (divorce, illness, etc.), but if financial irresponsibility on your part was the reason then you may need to take a hard look at your finances and spending habits. Don’t be too hard on yourself though. As everyone knows, sometimes bad things happen to good people. Filing bankruptcy is NOT a defeat on your part, but rather a new beginning, a refreshing of your financial life. Think of your bankruptcy as a gift. It is a little known secret in the financial industry that some lenders actually prefer post-bankruptcy borrowers as they cannot refile bankruptcy for another 8 years.

Realize that you are not alone. When you go through a bankruptcy, many people feel like financial lepers. They feel like they are the only ones going through financial distress. Nothing could be further from the truth. Since 2007, over five million people have filed bankruptcy. Bankruptcy filers come from all walks of life and from all socioeconomic groups.

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Check Your Credit For FreeAvoid unscrupulous lenders and programs. Post-bankruptcy, you are particularly vulnerable to predatory lenders such as payday loans and rent-to-own retailers. You will want to avoid these types of businesses as they promise easy credit, but charge extremely high interest rates (some payday loans are as high as 625% APR). If you find yourself needing a personal loan, it is best to wait until you have established a few months of good credit by paying on a credit card first as you will be in a better position to be approved. You are also easy prey for “credit repair” businesses that promise for a fee to remove items from your credit report. No one can remove anything from your credit report unless it is an inaccurate item. No program or any amount of money can remove accurate items from your credit report. The only way to repair your credit is to rebuild it by doing the following step.

Look into opening new credit lines. You might be asking: “More credit? Should I get credit cards post-bankruptcy? Isn’t that what got me into trouble in the first place? How can I get credit cards post-bankruptcy anyway? Who would give me a credit card?” All of these are quite common and valid questions post-bankruptcy. Well, in order to rebuild your credit you must first obtain credit. There are credit card issuers who will offer you a secured credit card just a few months after your bankruptcy. Secured credit cards typically have lower credit limits as you must provide a deposit which acts as your credit limit and higher than average interest rates. Nevertheless, they are important cards to get in order to re-establish a positive credit history. Secured credit cards can be used the same way as traditional credit cards. Secured credit cards also report to the credit bureaus just like a traditional credit card. After a few months of using a secured credit card and paying the bill on time every month, you should be able to obtain a traditional credit card. It is definitely not advisable to haphazardly apply for new credit cards continuously as every credit inquiry will count as a “hit” on your credit report. Only apply for a new card every four to five months, and keep the number of times you apply to a minimum.

About six to nine months post-bankruptcy, you may wish to obtain a personal or auto loan. It is very important to start re-establishing a positive credit history as soon as possible in order to build your credit score quickly. Keep in mind that a good credit score is comprised of an even mix of both installment credit such as loans and revolving credit such as credit cards. As you make your monthly payments on time, you will see your credit score rise. Factors that will strongly influence the lender’s decision to approve your application are your employment status and your recent post-bankruptcy credit history.

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Create a realistic budget and pay all your bills on time. A budget helps you control your spending. Budgeting software or a spreadsheet you create yourself will enable you to create a budget, keep track of your expenses, and set financial goals. In order to successfully re-establish your credit, you need to be sure to make timely payments. Your payment history will be reflected on your credit report and will have a huge impact on raising your credit score. However, if you fail to make on-time payments, your credit score will suffer a double negative impact considering you just emerged from bankruptcy.

Be sure to monitor your credit report regularly. Inaccurate items plague most people’s credit reports particularly those who have gone through a bankruptcy. Consider signing up with a credit monitoring service. It is vitally important to monitor your credit report post-bankruptcy to ensure that all the items from your bankruptcy have been discharged from your history. You also need to check your report for authenticity of accounts making sure that no one else has opened accounts in your name. Identity theft is quite common and anyone can be a target.

Bankruptcy can be a difficult process. However, the good news is that your burden of debt has been lifted from your shoulders. You can now start rebuilding your credit and start living the life you want, debt-free!

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Image: anathea, via Flickr

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