You've declared bankruptcy. Now what?
Life after bankruptcy
- Adopt a no-frills lifestyle.
- Rebuild good credit.
- Pay all bills on time.
- Build up a savings account.
- Get a credit card and pay off every month.
- Focus on the end result: free of debt.
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 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 is over."
If you've filed a Chapter 13, it 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 each month.
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 10 years from the date you filed your case.
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.
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, you need to re-establish good credit, right away for a Chapter 7 or after reorganization for a Chapter 13. 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 on to your house, paying your mortgage on time will improve your credit report, so long as you reaffirmed the loan while your bankruptcy case was active. If you did not reaffirm the loan, the lender will not report future payments to the credit bureaus. (Also, 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 FICO, the company that developed credit scoring.)
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."