Valued cars
Many people mistakenly believe that they will never be able to borrow money again after filing for personal bankruptcy. On the contrary, lenders are more than eager to lend money to those who have just discharged a bankruptcy—at an inflated interest rate! The situation is a win-win for lenders typically, as they will require some collateral upfront, charge a higher than market rate, and they also are secure in the knowledge that the debtor cannot file bankruptcy again for at least seven years.
Most often, people file for bankruptcy due to reasons beyond their control: loss of a job or significant portion of their income, or extremely high medical bills due to a serious illness or accident. Rebuilding and getting back on track as soon as possible will save untold thousands of dollars in interest over their lifetime.
First Things First
The first step should be to establish a budget, in order to avoid potential future financial problems. A new credit card or car loan can go a long way toward boosting credit scores back to respectable levels, but only if they are always paid on time. People who file bankruptcy are given a clean slate and should use new credit cautiously!
Knowing what is affordable is key to staying out of trouble. A budget that figures in the exact amounts spent on bills and expenses and compares them to monthly income is essential to figuring out what is left over at the end of each month. If it’s within the budget to take out a new loan, while still leaving a little cushion for emergencies, it makes perfectly good sense to move forward.
Credit Cards
Some credit cards can be kept through a bankruptcy. If anything is owed on a credit card, it needs to be on the bankruptcy schedules as a debt, but most companies will allow a person to keep the card if they reaffirm the balance on the card and sign a new agreement, post bankruptcy. If the balance is zero at the time of filing, it does not have to be listed, but some companies might cancel the card just because a bankruptcy was filed.
Once the bankruptcy is discharged, debtors will likely be bombarded with others for new credit cards, both secured and unsecured. On the surface, an unsecured card appears to be the better idea. However, many card companies that offer unsecured cards post-bankruptcy will limit debtors to a very small balance and charge exorbitant fees and interest rates. Often, a secured card might be the most cost-effective means of re-establishment.
Auto Loans
Many times debtors will receive offers for new automobile loans from local dealerships even before the bankruptcy is discharged. Be especially careful when looking into purchasing a new or pre-owned car. Keep in mind that the first car loan established post-bankruptcy will have an astronomical rate. A good strategy is to purchase a used vehicle in a lower range and pay that loan faithfully for at least six months to a year before stepping up to a more expensive car. As an example, payments on a $5000 loan for 36 months at 18% would be $180, and the total interest paid if the loan remained open for the full three years would be just over $1500. In contrast, financing $20,000 over sixty months at 18% would equal at payment of $507, and total pay out would be over $10,000 in interest over the term. Once the first loan is either paid off or traded in, the second post-bankruptcy loan should be closer to standard rates.
Hidden Fees
Many lenders and credit card companies will take advantage of their customers who have had credit problems, and often people will not realize it until is late. Contracts and fine print on credit card agreements need to be read in their entirety before signing. Be especially aware of overdraft fees, late fees, annual cardholder fees, prepayment penalties, fluctuating and “penalty” interest rates. “Penalty” rates are often used to inflate a standard rate in the event a payment is even one day late. Though these fees seem petty, they can really add up in the event of difficulty.
There is financial life after bankruptcy. The main things to remember are to proceed with extreme caution, stay well within your means, and read everything.
For more helpful information, see Life after Bankruptcy.
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