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9 Steps to Take After a Bankruptcy
There’s no shame in filing for bankruptcy. In fact, about 1 out of every 30 adults filed for bankruptcy in 2016 (about 3%). Life can throw curve balls, and there are many things that are out of our control. Unexpected medical bills, deaths in the family, or illnesses can lead to bankruptcy. It’s also possible that student loans and other debt can grow out of control. The media paints a scary picture around bankruptcy, but it’s not as bad as it seems.
You have a fresh start. The slate is wiped clean. Sure, there are some downsides, but there have to be so that everyone doesn’t declare bankruptcy all the time. With some work and patience, you can rebuild your credit. Actually, bankruptcy may lead to a better credit score sooner than paying the minimum or late payments would have. The creditors have stopped their harassing calls, and you can focus on the next chapter in life.
We’re going to talk about 9 things you can do to move on and rebuild after bankruptcy, but first let’s touch on the differences between Chapter 7, 11, and 13 filings.
What’s the difference between Chapter 7, 11, or 13?
Chapter 7 bankruptcy is the most common for individuals and small businesses. It’s also the fastest to complete. In this scenario, you offer up the assets you own to partially pay back your creditors. After that process is complete, the remaining debts are discharged. Small businesses that go bankrupt under Chapter 7 are liquidated.
If you’re part of a partnership or corporation that wishes to do business during and after bankruptcy, you could file a Chapter 11 bankruptcy. In this scenario, you can use some of your assets to pay a portion of the debt. You then set up a repayment plan to pay some or all of the remaining debt back over the course of the next few years. There is no time limit on Chapter 11 bankruptcy repayment plans.
Chapter 13 is used if you own a home and want to avoid foreclosure. Filers of Chapter 13 usually can pay a portion of their debt but not all. You’ll also set up a repayment plan but this plan has to be fulfilled in three to five years. So as you can see, your “after bankruptcy” picture will look different if depending on the type of bankruptcy you’ve filed. But there are some common steps you can take next to move on and rebuild.
Step one: Try to move on psychologically and emotionally
Going through bankruptcy can be a disheartening experience. Not many people plan on declaring bankruptcy, so it can be a hard thing to accept when it happens to you. Maybe you’ve hidden it from your friends or family. Whatever way you choose to handle it, make sure that you have people you can talk to. If shame or embarrassment is becoming a big problem, it might be a good idea to talk to a counselor.
Most health insurances include coverage for counselors, and they can be a big help in a time like this. Also, remember that you’re not alone. Almost 800,000 people filed for bankruptcy in 2018, and there are bound to be people in your network who have done it before.
Step two: Pinpoint how it happened
It’s always uncomfortable to take a hard look at ourselves. But to avoid bankruptcy in the future, this is what you need to do. Take some time and come up with the reasons you think led to your bankruptcy. They can be things in your control or out of your control. Sometimes bankruptcy was unavoidable no matter how many good decisions you made. But other times, you can see that if you had taken a different path, you’d be in a different place today. Just look at the experience as something you can learn from.
Maybe you overestimated the profitability of your new product and sunk too much into it. Or maybe you were living the lifestyle of the rich all on credit cards. Or it could be something as simple as your jobs after college not paying enough to make payments on all your debt. If you aren’t a business owner, it could be a good idea to take some business courses online (just free ones). Try to think of yourself as a business. Make sure you can keep track of all your income and expenses. If you have the choice of doing two different things, choose the one that would support the health of your business.
Step three: Vow to stick to a budget
On the subject of income and expenses, the most important thing you can do is to vow to stick to a budget from now on. It doesn’t work to juggle things in your head. You’ll always forget something. It’s easy to forget when payments come out or even that a written check can take a couple of days to come out of your account.
Maybe you’re not someone who writes everything down. But there’s good news. Personal budgets are so important that you can find hundreds of apps to use. These apps vary in terms of what they do, but all of them help you plan and stick to your budget. Some apps can connect to your bank account and let you know how much money you have left for eating out versus going grocery shopping.
Some apps let you put in all your expenses in a calendar form so you can visualize your month. That way, you can plan when you need to hold off on the extra Starbucks or when you can afford it. Budgeting like this takes some work, but you’ll be in a financially safer place if you can do it.
Step four: Look into credit repair
Even though a bankruptcy can discharge your debt, it doesn’t erase your credit report. You’re still the same person with the same credit history. That’s why you’d want to fix any issues that could be on your credit report. Errors or mistakes on your report can lead to a lower score. You can get your full report for free from each of the credit bureaus.
Check it for any kind of error: errors in your information, in amounts of loans or credit, bills, and history. Even though your debts are discharged, it’s not unheard of to see old accounts as still delinquent. If you find any issues, you can submit a request to have your report changed. Alternatively, you can work with a credit repair service who can handle the communication with the bureaus. We offer a free DIY credit repair kit to get you started.
Step five: Save money
This one might seem like a no brainer. So why talk about it? Well, saving money can help you avoid similar problems in the future. It might seem like its a hard thing to do, but if you even save $50/month you’d have $600 saved at the end of the year.
A good goal is to have $1000 saved up as an emergency fund. The purpose of which is to use only in an emergency (self-explanatory). That way, if your car breaks down or you suddenly have to pay a medical deductible, you’ll be less tempted to use a credit card.
Once you have an emergency fund saved, you might want to consider using a fractional investing app like Stash to save more. Investing does have risks, but with Stash, you can invest small amounts in diverse funds that perform well. Having some of your savings in an account like this can help it grow through 4% to 7% compound interest. That means if you put in $200 and let it sit for a year, it could be $215 by the end. Pretty cool for not doing anything.
Regular savings accounts only give you fractions of a percent in interest. But, of course, savings aren’t meant for making money. They’re meant for saving money for the future. Using a small investment account to save should only be done if you already have a good savings account in the bank.
Step Six: Open a secured credit card
Speaking of credit cards, another good thing to do is open a secured credit card. With this arrangement, you provide a security deposit as collateral. That way, if you stop paying your balance, the lender has a way to recuperate their losses. Typically, you get a credit limit equal to the money you put in. And if you’ve just had a bankruptcy, you might not get any more than a $500 card.
Besides the deposit, a secured card works just like a regular credit card. You can build your credit with it. Just be sure that you go slow and are able to pay the balance on time. One technique is to use your credit card only for groceries, and then immediately pay off what you just spent with your real money.
After you’ve been using a secured card for a while, you might be able to upgrade your card to an unsecured one. A credit card company who has seen you manage a secured card with them is more likely to give you an unsecured card then a company you don’t have any history with.
An important thing to keep in mind is that after bankruptcy, you should try to only use 10% to 15% of your available credit each month. So if you have $500 available, think of it more like $50 or $75. Credit utilization is an important factor in determining your credit score. After a bankruptcy, you want to give yourself the best chance at rebuilding your score.
Step seven: Raise your income with side hustles
This step is a lot easier said than done. You might think “Sure, if I could have raised my income I wouldn’t be in this mess.” And that could be true. We aren’t talking about changing your main job, but just adding something you can do on the side temporarily. Today, especially with computers and the internet, there’s a lot of opportunities to make a second income that can really help for saving or paying bills.
Any search for ‘side hustles’ online will retrieve pages of results, so it takes a little research and experimentation to find what’s doable and profitable for you. One popular and easy side hustle is to flip items you find at garage sales or thrift stores for profit online. People practically give away items that someone would pay good money for. With an online marketplace like eBay, you can find those buyers. But you have to be smart about what you buy and how you list the item. Smaller items like collectibles, books or electronics do better since they are cheaper to ship.
Another idea is to give lessons on a subject or skill that you’re good at. If you’re really good at something, chances are there is someone who would pay you to teach them. You can even do this online via video chat. The point of a side hustle isn’t to replace your income. It’s just to turn some of your TV or entertainment time into time that can bring in a little profit.
Step eight: Take out a small loan with a co-signer
This is a technique you can use if you know you have the ability to make payments on time. Getting a loan can be a hassle after you’ve filed for bankruptcy, so this can be a great option for someone looking to rebuild their credit.
A cosigner doesn’t have to be a family member. A cosigner can actually be anybody who trusts that you’ll be able to make the payments. The cosigner is pledging to stand beside you and pay the loan themselves if you can’t pay it, so it’s important that they know you and trust you. A good cosigner will also have good credit standing and enough income available to absorb your loan.
Once you take out a loan with a cosigner, you can make payments towards it that reflect on your credit report. Over time, this can be a great way to increase your score. And it’s a great option for people who’ve declared bankruptcy.
Step nine: Keep educating yourself about bankruptcy its after effects
There’s a lot of misinformation surrounding bankruptcy. This can lead to doubt and fear in the process itself and what comes after. It is a life-changing event, but it can be a positive one. If you weigh your options, bankruptcy can provide a fresh start and lessen your daily stress. It could be better than continuing on a path of late payments and overwhelming debt.
One popular myth about bankruptcy is that you can’t get a mortgage for 10 years. That’s not the case at all. If you filed for Chapter 7 bankruptcy, you’re only required to wait two years before applying for a loan. The loans you get at this stage are through the FHA, so they’re not the best, but you can certainly find a mortgage that can work for you well within the 10-year mark.
Since bankruptcy erases the delinquent status of your accounts, you can actually raise your FICO score a good amount in a short time. After a year or two of intentional work, you won’t have to settle for high-interest rates. You could start to see offers that reflect a Good credit score instead of Fair or Poor.
It may seem like bankruptcy is a lonesome path, but it doesn’t have to be that way. There are many online resources for surviving and thriving after bankruptcy. Check out the sites by Care Connect, US Courts, and the US Government for some ideas. Bankruptcy is nothing to be ashamed of. Remember, try to find people you can talk to. If you can’t, seek out a counselor for that purpose.
We talked about some steps you can take after bankruptcy to get back on your financial feet. Beyond this, there are other places you can go for free financial education. In fact, just searching “free financial education” will return many great results. Try to figure out the topics that you don’t have the best grasp of and start there. Is budgeting something that you’ve struggled with? You’re not alone.
Only 41% of Americans have a budget that they stick to. That’s despite the fact that most people admit budgeting is an important part of a solid financial plan. This might be because people think it takes longer than it actually does to start and run a budget. Remember, there are many apps that alleviate some of the hassles of budgeting. Just a few minutes a day can make a big improvement in your financial confidence for the future. We hope this guide has given you the confidence to continue rebuilding your credit after bankruptcy. Think of it as a fresh start to build strong financial knowledge and move ahead.
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