When financial circumstances beyond your control (such as loss of income, divorce, or a catastrophic medical condition) push you over the brink, you may have no other recourse than to file for personal bankruptcy. However, that does not mean that you will never be able to get credit again. On the contrary, it is now relatively simple to right the ship after bankruptcy, and it’s imperative that you immediately take steps to improve your credit rating.
Often called a “fresh start” bankruptcy, a Chapter 7 effectively wipes out your debt, or at least a major portion of it. (You may still be responsible for taxes and other government debts, and child support payments.) The word bankruptcy does carry a strong negative undertone, and there are some people who may feel that you’ve done something wrong. Do not let them drag you down. Instead, start right away to give yourself a truly fresh start that will give you a much more positive and healthier financial status in the coming years!
Here are some things you can do, right now, to help yourself:
- Reaffirm on your auto.
If you have a good car that you still owe money on, this may be the way to go. You will get to keep the vehicle and continue paying it off. A reaffirmation tells the lender that you want your car and will make the payments faithfully from that point on.
Be certain that this is in your best interest before signing the reaffirmation agreement. Your attorney can help, but you should know what the car is worth and how much you owe. Also note the costs for any needed repairs to the vehicle in determining the value. Be certain that what you owe is not significantly higher than the value.
Many people keep vehicles with very high payments because they don’t think they’ll be able to buy another car for years. That thinking is mostly flawed; though the interest rates will be higher, purchasing a less expensive car can help lower the payment.
Carefully consider this option, because if you do keep the car and can’t keep up with the payments, repossession after the bankruptcy can have an even more detrimental effect on your credit rating. Surrendering the vehicle during the bankruptcy is a better option.
- Establish new trade lines.
Your credit rating is based on your open trade lines, and they must be open for a minimal amount of time (usually six to nine months) to affect your credit score. Re-establishing trade lines right away is the most important thing you can do to fix your credit situation. Local banks and traditional credit card companies will most likely turn you down, but some banks will issue you a credit card with a deposit account for collateral. These are called secured credit cards. Be aware that the fees are higher on these accounts because they are riskier for the banks, but do not pay exorbitant fees to any bank for this privilege. There are many banks that will lend you a helping hand in your time of need, with the hope that you’ll become a loyal customer.
Passbook loans are a traditional means of establishing credit, though it can be tough to get the banks to report to the credit bureaus. In this scenario, you basically are borrowing your own money from your passbook and repaying yourself.
Though neither of these options is perfect, they will get you started on the road to clearing up your credit. In the case of secured credit cards, they often will become unsecured after you make a series of payments on time.
- Clean up your credit report.
You may feel that it’s futile to work on your credit reports at this time, but it is absolutely mandatory that you check each of the three main credit bureaus and be sure that all of your debts are marked as discharged through bankruptcy. You want those trade lines to show as closed, otherwise that old, negative information will be figured into your credit score going forward.
- Never let anyone talk you into co-signing.
Surely no one would allow you to co-sign for a loan, right? Wrong. Lenders know that recently discharged debtors cannot eliminate debt using Chapter 7 again for eight years, and that actually makes you an attractive co-signor, especially if you now have a nice, stable, and legally attachable income.
- Don’t carry balances on your credit cards.
Impossible, you say? It really isn’t. Just be sure that you know exactly how you will pay off any debt that you incur on your cards each month. You want to get into the habit of planning for things like vacations by saving, or at least having a plan to pay your cards off immediately. It is okay to put $2000 on your credit cards in November if you know you’ll get a bonus in December and pay it off. Buying extravagant items with no idea how you’ll pay for them, is not!
- Put together an emergency fund.
What does that have to with your credit? Everything! Faced with a major auto repair and a credit card bill that’s due, you often must fix that car. However, if you have a little cushion in the bank, emergencies are handled and life goes on. Most experts will suggest that you put aside three months worth of living expenses. Nowadays, with unemployment as high as it is, that might be a pipe dream. But, every single person should strive to put aside $500 into their rainy-day fund for emergency use only! Forego a couple of lattes or a night out once each month and put the money in the bank instead. You will be doing a great thing for yourself!
- Write out your financial story.
Having a statement prepared about how you got into the financial situation that caused the bankruptcy can go a long way toward helping lenders understand. After all, lenders are people. They want to feel good about those they are lending to, know that you’re remorseful for your situation, and that it was out of your control. Remember, there are deadbeats out there! There are people with expensive tastes who run up credit cards, buy new cars and houses, and then file for bankruptcy to wipe a lot of the debt clean. (Tougher bankruptcy fraud laws are helping to curb some of these types of abuses.)
- Remember the glass is half full!
The first year or two after you file bankruptcy will be tough, but you will need to stay positive to get through it and recover. There are people who wait years to re-establish credit of any kind because they’re emotionally devastated. This is a huge mistake, because it takes much longer to re-establish after you’ve ignored the problem for some time. You must get busy cleaning up the old, negative stuff and adding new, positive trade lines right away!
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