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.
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
You do not have to be bothered by creditors discharged in your bankruptcy. If a discharged creditor does bother you, just tell them you filed bankruptcy and they should leave you alone. If they don’t, just let us know! They may now owe YOU money. We would love to be of assistance. Just let us know and we’ll be happy to help.