Bankruptcy Is Not the End of the World

Filing for bankruptcy is a life-changing event that should not be taken lightly. However, when you have an overwhelming amount of debt and few other options, it can be an important step toward recovering from a bad financial situation. While the consequences of bankruptcy are dire, they are not life-ending. With enough time and effort, you can overcome the obstacles and rebuild your credit.

The Ins and Outs

Filing for bankruptcy may require you to sell off some of your possessions. However, most states have exemptions that will allow you to keep more than you need. Some luxury items may need to be sold, but the bulk of your property should remain intact.

Depending on the type of bankruptcy filed, much of your debt can be eliminated. Credit card debt is often the biggest factor that bankruptcy helps alleviate, but certain types of debt, such as student loans, will not be annulled.

You will also lose all of your credit cards, and will have little chance of successfully applying for a mortgage in the near future. Fortunately, good financial planning can eliminate the need for credit, and you may still be able to get a mortgage long before the bankruptcy is removed from your credit report.

Managing Your Finances

It will be difficult to obtain any form of credit soon after filing for bankruptcy, so you will likely need to live well below your means for some time. Cut costs wherever you can. That could mean moving to a cheaper apartment, taking the bus more often, or spending less on food.

Calculate how much you can save, and put that money into your savings account immediately after each paycheck. While saving money is a critical part of a long-term financial plan, at the bare minimum you should establish an emergency fund totalling around three months salary. This can help you pay for unexpected expenses without requiring access to credit.

Building Credit

A few months after your bankruptcy, you should consider getting a secured credit card. These require you to pay a certain amount of money upfront as a deposit. Your credit limit will often be the same as that deposit. Using that card for purchases and paying off the full amount each month will enable you to build up your credit score.

After roughly a year of paying off a secured credit card on time, you may be eligible for an unsecured card. This card will likely come with a high interest rate. Fortunately, if you’re diligent in paying the full balance each month, you won’t have to pay any interest at all. With savings to cover any emergencies, you should be able to maintain a monthly balance of zero on the card.

Looking to the Future

Filing for bankruptcy is a hard choice, and recovering from it is even more difficult. A chapter 7 bankruptcy will remain on your credit report for ten years, limiting your ability to obtain credit and loans. However, ten years isn’t forever, and with good financial habits you can start recovering long before that. The more your credit score increases, the less that bankruptcy will matter to potential lenders. Your interest rates will drop, and it will get easier to find a home or auto loan.

It’s not an easy road to be sure, but there is light at the end of the tunnel.