Bankruptcy provides people with a viable solution to serious financial problems. When someone loses a job or medical bills are making it hard to cover other payments, filing bankruptcy can give those consumers the fresh start they need. Once you make the decision to file, you may have questions about how your life will be afterwards. Here are some of the benefits and possible problems you should be aware of.
Chapter 7 vs Chapter 13
Your attorney will take the time to explain the difference between different bankruptcy options. You probably know that Chapter 7 is a full write-off while chapter 13 is a restructuring that is designed to provide you with more reasonable interest rates and payments. Bankruptcy can remain on your credit for a full decade. Both options may make it more difficult to get credit again immediately, but rebuilding your credit and your life will not be impossible.
Getting Credit Afterwards
While you may not want to take out loans again after your bankruptcy, there does come a point when you will need to finance a car or get a loan for something else. Surprisingly, people who have filed a Chapter 7 often have a slightly easier time getting back into the credit market than those who filed a Chapter 13.
It is wise to avoid unsecured debt after a bankruptcy. However, there will come a point when you want to buy a home or get a car. A general rule of thumb is that the bankruptcy will not be as damaging to your credit after about two years. Unfortunately, you can still expect to pay higher interest rates when obtaining a loan. In addition to higher interest rates, you may also find that banks will want application fees, processing charges and other hidden costs that drive up the cost of borrowing even more. When you first start getting credit, do not be discouraged by the unattractive terms. Instead, make a commitment to keep up with the payments. Having loans that are clean and free of late payments will go a long way towards raising your score and improving your credit. After a few years, you will find that your score will rise and your credit offers will improve.
It is important to understand that filing bankruptcy does not mean the end of great credit scores. Your credit score is based on a number of factors, including late payments and your debt levels. Someone who has a great deal of debt and is making late payments will probably have a lower score than an individual who filed bankruptcy three years ago and has been responsible with credit ever since.
Improving the Score
You may have a few accounts that remain with you even after the bankruptcy.
Be sure to pay those bills on time every month to start raising your score
and improving the history. You can apply for credit, but be cautious as
you take this step. Secured credit cards are a great choice because a
low limit will help you stay out of debt.
As you improve your score, consider getting a new loan to help improve your score further. Only take a new loan if you are certain that you can cover the monthly payment. You may receive offers from credit repair services, but you can accomplish the same thing by making your payments on time and limiting your number of new accounts.
Filing Multiple Bankruptcies
Consumers can file for bankruptcy as often as they want, but there are
strict limitations guiding how bankruptcies are discharged, and this effectively
prevents people from filing again too quickly. Here are the timelines
for different scenarios:
• Two Chapter 7 Cases – After having your debts fully discharged in a bankruptcy, you’ll have to wait eight years before you can receive another chapter 7 discharge.
• Two Chapter 13 Cases – If your payments were restructured in a bankruptcy and you need to go through the process again you can file right away but cannot receive a discharge unless it has been two full years.
• Chapter 13 to Chapter 7 – Some people complete their chapter 13 case and wind up struggling financially again later. They can choose to then file a chapter 7 six years from their original chapter 13 filing date.
• Chapter 7 to Chapter 13 – There is a four year waiting period to have debts restructured and discharged after filing a chapter 7 bankruptcy. You can still file a chapter 13 bankruptcy, you will just have to pay back all of your debt.
Bankruptcy and the Mortgage
When you file bankruptcy, you need to decide if you will keep the house or file on the family home. There are a few ways to handle this particular debt, and you need to know what to expect based on the choices you make.
If you are underwater on the mortgage or unable to cover the payments, then you can surrender the home in the bankruptcy. Any past due amounts or balance remaining on the mortgage after the home is sold through the bank can be written off in the bankruptcy. However, any equity over $35,000 in the home may be lost if you choose this route.
If you reaffirm the loan, then you essentially promise to repay the debt. You can remain in the home, and the payments will be reported on your credit. This is generally only an option if you are current on the mortgage. The reaffirmation may also provide you with new terms, including a longer repayment period, lower interest rates or both.
Establish an Emergency Fund
Before you filed bankruptcy, emergency situations were probably taken care of through the use of a credit card. In the years immediately after you file, credit will not be readily available for you. The cards you had before filing will probably be shut down if you included them in the bankruptcy, and other companies will not be anxious to extend credit to you. Having an emergency fund available ensures that you are still able to take care of emergency situations on your own. You will have more disposable income after the bankruptcy, and you should plan to put a certain amount into your emergency savings account ever month.
Cash is King
After your bankruptcy, cash is going to be king. Credit will be hard to come by for a couple years, and you may not like the interest rates you are offered when you can find a lender. Having a clean slate again is often worth the inconvenience of seeing your credit score drop, but you should still be ready to pay cash for everything you need. Getting into the habit of paying cash for what you need and doing without the extras will also help keep you out of financial trouble moving into the future.
Learn to Budget
Learning how to budget is important after a bankruptcy. Knowing how much money you have available for groceries and entertainment will help you avoid overspending and ensure that you have the funds on hand to cover your other living expenses. When you create a budget, you will find that some expenses are easy to account for. You know how much you spend on utilities, rent, car payments and insurance. The more difficult expenses to account for include gas, food, entertainment, wardrobe and other little extras.
As you are going through the bankruptcy process, prepare for your new budget afterward by tracking your spending. Write down everything that you pay money for so that you can effectively work out a realistic budget. With the information in writing, you can categorize and organize it. You may be shocked to realize how much you spend on fast food or other habits, and this makes it easier to decide where you will make changes to save money every month.
When you are developing your new budget, remember to include money for your emergency fund and retirement. Learning how to save money today will help you avoid bankruptcy in the future. You may have to make some sacrifices in your spending, but it is worth it to secure a better financial position.
One key step in budgeting is breaking it down into manageable sections. While you may have $1,000 a month for groceries, tracking that much money over the course of a month may prove difficult. It is far easier to allow yourself $250 a week for groceries. You will not feel as overwhelmed, and it can help you stay in control of your finances.
Staying out of Debt After Bankruptcy
Bankruptcy is a legal and viable option for addressing debt, but you do not want to file bankruptcy multiple times. The expense associated is only one of the pitfalls. You also do not want to continue dropping your credit score by having to file again. When you are given the clean slate of bankruptcy, you should take advantage of it by changing some financial habits.
Use your budgeting process to look for little habits that could stand to be changed. You may discover that you are spending more than $200 a month on gourmet coffee every morning and decide to start brewing your own. If your gas consumption is high, consider making changes in your driving habits to bring that expense down. As you improve your spending habits, you will have more money leftover month for developing the emergency fund or creating a little cushion in your checking account.
Establishing a budget and paying with cash will go a long way towards keeping your credit clean and your finances strong. However, you may need to make some other changes. Once you determine your budget for food and other necessary items, you can see how much money you have leftover for entertainment, clothes and other extras. Learn to live within your means by limiting your spending and staying within your budget. You can still make large purchases, but you should save up for them rather than reaching for a credit card. When you are tempted to use the credit cards more, remind yourself of the high cost of interest charges and your desire to remain financially solid.
Unintended Side Effects
Not all consequences of bankruptcy are immediately related to credit and
financing. You may see a slight increase in your auto insurance rates
after filing. Some companies will look at your credit report if you are
applying for management or finance positions. The bankruptcy may still
be the best choice in your position, but it is important to be prepared
for the full impact.
Bankruptcy is the right choice for many people who are in over their heads and are unable to make payments. Even if you are covering the minimum due every month, you may still want to consider bankruptcy if there is nothing left for retirement or emergencies. When you are prepared for the consequences, then you can focus on moving forward and improving your finances. After a few years, the bankruptcy may not even effect your credit very much and you may find that your financial position is drastically improved.