After Bankruptcy

Sometimes bankruptcy is necessary and just cannot reasonably be avoided.  We want you to learn as much as you can from this challenge, rebuild your credit and move forward to a positive financial future.

Remember: You Are Not the Only One to Ever File Bankruptcy

The very first thing you should do is realize that in recent history there are more than a million bankruptcies filed on average each year in the US. You are not alone in having filed bankruptcy – hardly.  There are many learning experiences in life – and bankruptcy and the events that led up to it are just another one of those opportunities.  So, learn all that you can from it and resolve to move forward. And as you do that, don’t forget that MANY successful people filed bankruptcy only to thereafter go onto success on MANY levels. If you get a chance, you might take a look at the book:  “Bankruptcies and Money Disaster of the Rich & Famous” and you’ll see that you are in good company. Further, don’t forget that occasional debt relief is noted in the Bible and is specifically provided for in the US Constitution (Article 1, Section 8, Clause 4). So, try to learn everything you can from the experience and move forward!

Remember: You Filed Bankruptcy for a Reason

Don’t forget that you filed bankruptcy because you either could not pay your debts as they came due or you expected that would happen soon.  That means, had you not filed for bankruptcy protection, your credit report would have gotten worse AND you would still owe the money. You may have had to deal with lawsuits, garnishments, foreclosures, additional negative credit report entries. So, don’t forget the benefits/protections you obtained from filing. We will continue to help you so that you can get the most out of this experience. 

Remember: The Bankruptcy Wont be on Your Credit Report Forever

The federal Fair Credit Reporting Act states how long a bankruptcy can be listed on a credit report. A Chapter 7 can be listed ten years from the date of filing.  15 USC § 1681c. A Chapter 13 can also, legally, be listed ten years from the date of filing. 15 USC § 1681c. However, credit reporting agencies indicate they will voluntarily list a Chapter 13 bankruptcy filing for only seven years. Apparently, that is something of an incentive to a debtor to file a Chapter 13 and repay creditors as much as possible. As discussed further below, the fact that your credit report shows you filed bankruptcy does not disqualify you for all credit – hardly. That’s just not how it works. Bankruptcy is just one factor, albeit an important one, in determining your credit worthiness.

Remember: Post-Bankruptcy Credit is Not as Bad as You Think

There are many misconceptions about the impact on bankruptcy on your credit report/score and life. First, it is absolutely incorrect that you will be automatically disqualified for a home loan while bankruptcy is on your credit report. In fact, you can be in the middle of a Chapter 13 and still qualify for an FHA home loan. Yes, there are loans you will not qualify for, but home loans are still available.  Here is a link to my article discussing when you might qualify for a home loan after bankruptcy.

Second, it is absolutely incorrect that you are disqualified from all new credit card accounts. In fact, many people get credit card offers in the mail soon after they file.  A Chapter 7 Client just emailed me as follows:

I just wanted to mention to you that shortly after my filing date, I received continuous offers to rebuild my credit and, specifically, to purchase a vehicle. I haven’t checked interest rates or anything, but I can see that there are people who want to do business with you even after bankruptcy. Just thought this was very interesting!  ~ R.V. (Client – 2015)

Why might that be? Most people that file don’t want to file again and, thus, they work very hard to make their payments on time. Also, from the cynical side, new creditors know that if you just filed a Chapter 7, you cannot file a new 7 and discharge the card balance for another 8 years. On the availability of new card accounts following bankruptcy, a 2008 study showed that 96% of consumers were ordered new credit within a year of filing bankruptcy. That percentage is likely lower today, but you get the idea. Further, if needed, you might be able to get a secured credit card by making a small deposit for future charges.

So, while a Chapter 13 filing will remain on your credit report for 7 years and a Chapter 7 for 10 years, it does not mean you will have terrible or even bad credit for the next 7-10 years, depending on the type of bankruptcy filed. Below are a few practical steps to help you moving forward.

A Few Practical Steps to Take After Bankruptcy

After you have completed your bankruptcy, there are a practical steps you can take to reduce the chance of future financial stress and increase your creditworthiness for good purposes. Here are a few.

1.  Order A Copy Of Your Three Major Credit Reports Every Year – Correct Reporting Errors.

When someone pulls your credit report, you probably don’t want negative information on it that does not belong there. For all accounts discharged in the bankruptcy, you want to make sure your reports show the accounts are “discharged” or with a zero balance due. By federal law, everyone gets a free credit report for review each year – so get them. (Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.) Your credit reports should not show there is a balance do or that you are falling further behind on discharged debt (because you can’t fall further behind on a debt you don’t owe). Further, it is a violation of the Bankruptcy Code to report the status of the debt  incorrectly after filing and discharge. Pull your credit reports from time to time and make sure they remain accurate.

There are several places to get a free copy of your three major credit reports:

Equifax: 800-685-1111 or Equifax Website

Experian: 888-397-3742 or Experian Website 

TransUnion: 800-888-4213 or TransUnion Website

Annual Credit Report:  877-322-8228 or ACR Website

2.  Take A Financial Management Class Or Two – Educate Yourself About Finances.

Get wisdom. There are all sorts of places that offer free or low cost information or classes on healthy financial habits. You owe it to yourself to learn from every one of life’s challenges. Bankruptcy is no different. Plus, you can file a Chapter 7 once every 8 years (and there are other rules for other repeat filing scenarios). If you have a need to file and you don’t qualify, your finances can get quite uncomfortable.

3.  Make A Reasonable Budget – Then Live By It.

You need to know how much you make and where you are spending it. Then you can ask yourself if you are spending it is a wise manner. So, make a budget.  Keep track of your spending. And decide if you really need to spend $8 a day on coffee. You should have some flexibility in your budget for “fun stuff” – just acknowledge that you are spending some of your “fun money” on specialty coffee.

Also, budgets normally include things that people buy only once in a while – tires, clothes, etc. If you have set your budget up such that you have, for example, $100 a month set aside for future tires, tune ups and oil changes then you better set those funds aside each month in a savings account so you have the money when you need it.

4.  You Filed Bankruptcy – Understand That it is a Learning Experience and it’s Not Uncommon.

As I noted above, bankruptcy is not uncommon. You are human. Things happen. Learn what you can from the experience and move forward.

5.  Establish and Improve Your Credit Rating/Score.

Some people swear off credit cards and all credit after they obtain bankruptcy relief. And that is great as long as you don’t need credit. For those that want or “need” credit for certain things, for example, financing the purchase of a home, then you might want to rebuild your credit and improve your credit score.  FICO also has published a useful booklet on credit score issues.   (“FICO” stands for “Fair Isaac Corporation”.  They are the company that issues the often used “FICO” credit score.)

You can start doing that by getting new credit accounts. Some say the easiest ones to get are gas and store cards. If you belong to a credit union, you might find a new loan available at reasonable terms. VISA and other credit cards might be available. They come is both secured and unsecured varieties. “Secured” means that you have to give them a deposit – if you don’t pay them they take your deposit and apply it to the balance due. Unsecured simply means there is not deposit required.

But don’t be stupid about it. I once had a client that after bankruptcy bought a new truck for $25K and financed it 34.9% per annum! How do I know that?  Because he came back to me years later to file another bankruptcy and told me that the truck had been repossessed and he still owed $17K on the balance.  When I asked him why he bought the truck, he said he just wanted to rebuild his credit. He was lying at least to himself. What he really wanted was a nice truck regardless of the cost. He could have purchased a much cheaper vehicle to help rebuild his credit.

Speaking of “stupid”, avoid PAYING a high interest rate on new accounts. What do I mean? If you have a credit card with a 24% interest rate on carried balances, then don’t carry a balance! Use it and pay off the balance each month. Or, you might use it and then go home and make a payment to the card in the amount just put on the card. Yes, carrying a balance may better improve your report/score – but I would not do that on high rate cards.

Do not apply for every card under the sun. A large number of inquiries on your credit report (based on credit applications) can have a negative impact on your credit score. Pick and choose the ones you apply for. Wait to hear if you are accepted or denied before applying for another card. Also, having too many open accounts can work against your credit score.

Your rental history might be listed on your Experian credit report. So, that might also be helpful.

6. Understand How Your Credit Score is Calculated – and Act Accordingly.

Obviously, your credit scores are determined based on information included in your credit reports.  Your FICO credit score is very commonly used by potential creditors to determine creditworthiness.   Your FICO score looks at the following credit report categories and weights them as follows:

  • 35% – Payment History (as missed payments recede into the past, they hurt your score less)
  • 30% – Amount of Debt Owed (running a credit card up to the allowed limit will hurt)
  • 15% – Length of Credit History (do not close old paid off accounts; old accounts help)
  • 10% – Mix of Credit (good payment history on a credit card, home, car, etc. is a good thing)
  • 10% – Inquiries or New Credit (every time you apply for credit your score is hurt)

Knowing how your score is calculated can, obviously, help you increase it.

7.  Watch Your Credit Report For Fraud & Identity Theft.

Identity Theft has become a problem. If you see any suspicious account activity, contact your credit account holder immediately. The sooner you catch something like this, the better. Identity theft can negatively impact your life in a BIG way.

8. Create An Emergency Fund.

Things happen. Obviously. Try to set aside a few dollars each month for unexpected events. Make the fund part of your budget.

9.  Get a Will and Other Estate Planning Matters in Order.

We can help you with this. This is listed last, but it is certainly not least. If you or your spouse or another family member is incapacitated, you may have problems paying bills and/or getting necessary information without the necessary estate planning documents completed ahead of time such as a durable power of attorney. In more dire scenarios, a Living Will / Physician’s Directive is needed so that the person’s wishes can be known and family members don’t have to struggle with those difficult decision. Then there is the Last Will And Testament to determine how assets are distributed and debts are paid. You want to have these things taken care of before you need them.

10. Find a Good Financial Planner.

It’s never a bad idea to talk to a financial planner. They can help set certain financial goals and how to achieve them. We are always happy to help you with a referral.

After Filing: Annoying Creditors and Beyond

As you can see, you have a whole life still to live after bankruptcy is filed. The above only discusses part of what’s possible. We want to help you deal with discharged creditors that “did not get the memo” to “go away” and help you take the steps available to get and keep your financial house in order.

We care and we are good at what we do. We would love to be of assistance. Just let us know and we’ll be happy to help.