Life after bankruptcy
You've declared bankruptcy. Now what?
You have a fresh start, and some new challenges. Your
credit rating, which probably wasn't all that great already, has
taken a hit. The bankruptcy will stay on your credit report for
up to 10 years. Lenders see you as a bad risk because you've legally
written off at least some of your past debts. For a period of time
you may not be able to get a loan or credit card. Once you do, the
interest rates and fees attached will be punishing.
"The purpose of filing is a safety valve,"
says Roger M. Whelan, resident scholar of the American Bankruptcy
Institute, a nonprofit professional organization. "Thank God,
the day in which it was like wearing a blazing star on your forehead
If you've filed a Chapter 13, that means you're paying
off some of your debts in what's known as reorganization. For three
to five years, the court allows you a set amount to live on and
a court-appointed trustee divides the rest among your creditors
That means a very no-frills lifestyle. Sometimes
it means changing the basics in your life, like how much you pay
for shelter and groceries every month. And you can't take on new
debt like a credit card or car loan without the court's permission.
At the end of reorganization, your obligations are gone and your
money is yours again. But the fact that you've declared bankruptcy,
even though you paid back at least some of your debt, will stay
with you for five to seven more years.
If you filed a Chapter 7, you walked away from most
of the debt. Your salary is yours, if you have one, but the bankruptcy
stays on your credit reports for 10 years. You have to start living
on cash, rather than counting on any form of credit, and building
an emergency fund is key. In addition, creditors may view you as
a worse risk than someone who filed a Chapter 13, which means high
interest rates and punitive fees when you do get loans or credit.
The 800-pound gorilla: getting credit
It's the double-edged sword of post-bankruptcy
life: mismanaging credit may have gotten you into trouble (or just
magnified other problems), but you have to get credit to rebuild
your financial life.
After your bankruptcy has been discharged, right away
for a Chapter 7 or after reorganization for a Chapter 13, you need
to re-establish good credit. The rule of thumb: there are no rules.
How fast you build back your credit will depend on a lot of factors
that vary widely.
It also depends on what resources you have.
Obviously, if you have a high-dollar income, you have an edge. If
you managed to hang onto your house, mortgage payments on time will
improve your credit report. (Many apartments don't report to credit
bureaus, so those payments will keep a roof over your head but won't
help rebuild your credit, says John Ulzheimer, business development
manager for MyFico.com,
a division of Fair Isaac Corp., the company that developed credit
Ironically, people who file a Chapter 7 may have an
easier time re-establishing credit, says Henry Sommer, an attorney
and author of "Consumer Bankruptcy: the Complete Guide to Chapter
7 and Chapter 13 Personal Bankruptcy." "While you're in
a Chapter 13 [reorganization] your options are somewhat limited
in terms of credit."
When the discharge is complete you can start rebuilding
your credit while someone who went through a Chapter 7 at the same
time is already well on his way to repairing his credit.
Bankruptcy experts insist that attitude and persistence
can make a difference.
"The consumer who's going to recover faster is
the consumer who jumps back in," says Ulzheimer.
"Financial capacity is one thing,"
says Tahira K. Hira, a professor at Iowa State University who specializes
in consumer economics and family finance. "Mental or attitudinal
capacity is the other thing."
So if you build a savings account, carry no debts
and have an emergency fund, you're saying, "Look, I can control
my behavior," she says. "It depends on how good a salesperson
you are and how good your behavior has been."
But you have to shop lenders, "and there will
be a price attached, which is higher interest," says Hira.
In the first six months after your bankruptcy discharge,
you want to demonstrate you've learned from your financial mistakes.
You've got to be a model citizen from here on when it comes to financial
management. That means making all your payments on time and building
up a savings account for those inevitable rainy days. If you've
managed to keep a credit card through the bankruptcy, use it once
in a while to buy a necessity and pay it off immediately.
If you don't have a credit card, establish good financial
habits and apply for a secure card. "A general guideline would
be six months [after your discharge]," says Whelan, a bankruptcy
judge for 12 years.
You'll put money in an account and the credit card
company will give you a credit limit of that same amount. When the
bill comes in, you pay it, as you would a normal card. You get the
deposit back only when you close the account or switch to an unsecured
version. Some card companies may also be willing to give you a credit
limit higher than your actual deposit, says Curtis Arnold, founder
and spokesman for Cardratings.com.
Tip: Look for a card that reports to one, and preferably all, of
the credit bureaus.
The good news: Many secured cards report as unsecured
cards, says Arnold. "And assuming your account's in good standing,
once you've had it for a year you should start getting halfway decent
offers on unsecured cards."
Some smart shopping tips: Look for names you recognize
and the lowest fees and rates you can find. And only consider a
card that bills any fees to your card or bills you directly after
you receive it. When they want money up front, chances are it's
a scam, says Arnold.
"Generally, we say that if you get a secured
card, usually within six months to a year of good payment you can
qualify for an unsecured card," says Arnold. But don't apply
for more than one every six months, he says. Otherwise the inquiries
will zing your credit. And be prepared for sticker shock with APRs
from the high teens up to the 20s, he says.
One of the biggest problems with bankruptcy is that
borrowing money is going to cost more for a while. A lot more. If
you pay off the cards every month, you won't feel the sting of higher
interest rates. But subprime lenders are levying a host of fees,
both one-time and annual, just for the privilege of carrying their
"Usually they tack on application fees, processing
fees and who knows what," says Arnold. "It's not uncommon
to get hit with $100 to $300 that first year and $100 to $200 a
year ongoing. And this is the industry standard."
But you can win your way back with smart spending
habits. "If you keep your nose clean and make your payments,
within 24 months you can probably qualify for a halfway decent unsecured
card," says Arnold. Granted it won't be the 5 percent APR you
see on TV ads, but you might get one for 10 percent, he says.
If you've been through bankruptcy, you want to keep
an eye on your credit rating score. Appearing on your credit reports,
your score predicts the likelihood you will be delinquent on a bill
in the next two years, says Ulzheimer.
Yes, bankruptcy will zing your score. "But
most people who file have delinquencies and issues already on their
credit report," he says. "As such, the score has already
taken a severe hit."
Because everybody and his brother is looking
at your credit reports these days, bankruptcy may touch parts of
your life you hadn't even considered. It could send your insurance
rates up. "Credit is one of the factors that many insurance
companies use in pricing their policies," says Jeanne Salvatore,
vice president of consumer affairs for the Insurance Information
If you're facing a Chapter
13 and you have kids in private school, the courts may make you
put them in public schools, says Whelan.
"The judge has to set
[the filers'] standard of living," he says. And a lot will
depend on the judge and what he or she sees as necessary living
expenses. However, there is some latitude. For instance, if a child
has learning disabilities and needs a special private school, that
would be a different matter, Whelan says.
While it's illegal for employers
to discriminate against someone who's declared bankruptcy, many
employers do look at credit reports before hiring or promoting.
"If you have two people who are equally qualified, it's hard
for it not to enter the picture," says Hira.
One thing you can do: If there
was a compelling reason for your bankruptcy, such as a divorce,
business failure or sick child, list that on your credit report.
Your notation has to be 100 words or less. It won't affect your
credit score, but in cases where there is a judgment call like employment
or insurance, it could help you.
There is also human nature to consider. Bankruptcy
records are public information. And with this the age of computerization,
"It's very difficult to keep it private," says Whelan.
In addition, if you are having your Chapter 13 payments taken out
via payroll deduction -- a favorite of the courts, says Whelan --
then at least one person in your workplace will know about your
financial situation. (Another option is to have your check directly
deposited and an immediate bank withdrawal made the same day to
avoid getting your office involved, says Hira.)
Your financial future
Any bankruptcy is difficult. And most people who file have been
fighting financial problems for at least two to three years. "And
there's a psychological unhappiness about doing it," says Seattle
bankruptcy attorney Ken Weil. "It's an admission of failure.
Nobody is ever happy to come see me."
In addition, those who file Chapter 13 are looking
at several years on a strict money diet.
"What I tell clients before they file: 'You'll
feel wonderful when you file,'" says Weil. "'You're dealing
with a problem that's been beating you up for so long. This lasts
up to six months. Somewhere on the back end -- 30 months out --
you can see the light at the end of the tunnel. And at the end you
feel fantastic. But what I find is that somewhere in the middle
there is going to just be a horrible point. [You feel] I can't do
The best news: Time heals. Sure, it takes a decade
for the bankruptcy to fall off your credit report. But if you aggressively
practice good credit, the farther out you get, the less it will
matter. That means lower rates, lower fees and better deals on car
and home loans.
Dana Dratch is a freelance writer based in Atlanta.