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Special section 7 Bankrate experts with 7 top tips for '07

Bankruptcy is often called a "fresh start," but it's hard work re-establishing your life. Follow these 7 steps from the Bankruptcy Adviser to get your finances back on track.


7 steps to a fresh financial start in '07

Many bankruptcy attorneys like to call a Chapter 7 bankruptcy, a "fresh start" bankruptcy. In a way, it is a fresh start -- you do get to eliminate a great deal of debt. However, the reality of being bankrupt is not "fresh" at all. "Bankrupt" is a word with a strong negative connotation. It's often unfair, but there is a widespread perception that if you've gone bankrupt, you've done something wrong.

The truth is that you will need to start working immediately to truly have a positive, healthy life after bankruptcy. Follow these seven steps to give yourself a true fresh start.

7 steps for fresh financial start

1. Reaffirm your car debt. If you own a car and are still making payments, make sure you sign a reaffirmation agreement with the car lender. A reaffirmation means that you intend to keep the vehicle and continue making payments. If you fail to make payments your car can be repossessed and sold (with you liable for any deficiency). Signing this agreement is an act of good faith and will give you more leeway with your lender. Remember: Do NOT reaffirm the debt if you intend to surrender the vehicle. You will be financially liable for the balance and will not have a car to show for it.

2. Establish new credit lines. You need to re-establish credit as soon as possible. Most traditional banks and credit card companies will probably not approve you. However, some banks will allow you to deposit money into a savings account and issue a credit card attached to that account. This is called a secured credit card. Another possibility is a passport loan. This is when you deposit money into a savings account, borrow that money and pay the interest each month. Neither of these options is great -- they are, however, crucial. You see, you will have to do something like this eventually in order to be eligible for a credit card with a traditional bank. Getting started early is far, far better for you in the long term.

3. Clean up your credit report. Make sure all three credit bureaus show that your debts have been "Discharged in Bankruptcy." This is important because you want the trade lines (accounts) to accurately reflect that they have been eliminated.

4. Never co-sign for anyone! If you have just filed bankruptcy you will not be able to eliminate debt in a Chapter 7 for another eight years. Therefore, any co-signed loan that goes bad will very likely result in a judgment against you. The risk is simply not worth the reward. You may not receive an option to co-sign for a few years after filing, but when the option becomes available you MUST avoid it!

5. Never intentionally carry a credit card balance again. I know, this feels almost impossible. However, in a world where many of us live paycheck to paycheck, the extra money used to pay credit card balances is often the straw that breaks the camel's back. Remember, 85 percent to 90 percent of all bankruptcy filers do so because of incurring costs from loss of employment, illness or divorce. If you don't have a balance, should something terrible happen, you will have the financial cushion to help you cope. It's a tough habit to get into, but paying your balances each month is a great way to save money and provide for yourself in case of emergency. If you are faced with a balance, do everything in your power to stop using the card and pay on the balance until paid off.

6. Have a story prepared. Some people are deadbeats. Some people ran up their credit cards to support a drug habit. You need to make sure others understand that you are not one of these people, that you have legitimate reasons for filing. You want to have a specific reason -- to be stated in less than 20 seconds -- that says why you filed bankruptcy. More often than not, you will find people more willing to work with you when you have been honest, they see in your face your remorse and they understand that your reason for filing was something out of your control.

7. Stay positive. Even if you tend to be a negative person, you need to believe that you can get on with life and recover from bankruptcy. I have seen people who are so psychologically devastated after filing bankruptcy that they do not re-establish their credit for years. The result is that it takes them five to 10 years to begin improving their credit score when it only needs to take two years. Please avoid the ostrich approach to life after bankruptcy in which you stick your head in the sand and hope things work out. You must take the aggressive approach, knowing that you will encounter rejection, but eventually success. If you work hard and start immediately, you will soon reach a point where your credit will be strong.

Good luck to all of you this holiday season, and remember: Even though we're bombarded by advertising and the commercial energy of the season, the holiday spirit isn't about giving and receiving objects. It's about connecting with other people.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "bankruptcy" as the topic.

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-- Posted: Dec. 18, 2006
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