Bankruptcy can be financially and psychologically devastating. After you declare bankruptcy, you need to prepare yourself for a long period of financial rehabilitation. While it’s often described by money management experts as a “fresh start” that can give you some much-needed space from your creditors, the bankruptcy process can be highly detrimental to your credit rating. A record of your filing will remain on your credit report for seven years and make it difficult to secure inexpensive loans without finding a cosigner.
On the other hand, you’re not powerless in the face of your bankruptcy filing. By making smart financial decisions in the months and years that follow the discharge of your debts, you can mount a speedy recovery from this setback. Read on to learn more about how to manage your money after filing for bankruptcy.
First, wait a few months after the official discharge of your debts and then exercise your legal right to a free credit report from each of the three consumer credit bureaus. Before looking at each of these reports, you’ll want to brace yourself: Your score will have dropped precipitously since your last credit check. As after any traumatizing event, you’ll need to accept the initial consequences of your bankruptcy filing before you can truly begin to mount your recovery.
During the first year or two after your bankruptcy filing, you’ll find it exceedingly difficult to procure credit by traditional means. If you’re lucky enough to be approved for a credit card, it will likely be either a prepaid product that comes with a slew of hidden fees or a traditional card that requires a security deposit and carries a laughably low credit limit.
If you need credit during this transitional period, you may be forced to turn to non-traditional sources of funding like payday lenders, pawn shops and rent-to-own stores. These outfits are collectively known as “predatory lenders” for a good reason: They prey upon people with poor credit by charging obscenely high fees and interest rates.
While it may be difficult to resist the allure of so-called easy credit, you should do your best to avoid these lenders. When you become reliant on payday loans or rented merchandise, you open yourself up to the threat of default, court judgments and the wholesale repossession of your rent-to-own items. You stand to save a great deal of money by living frugally and seizing offers of traditional forms of credit.
You should start your search for new traditional credit facilities soon after your debts have been discharged. At first, this may be an uphill battle. For two or three years after your bankruptcy filing, you may only be eligible for high-interest, low-limit credit cards and second-rate auto loans from shady used-car dealers.
This will change over time. Before you’re eligible for more generous loans and credit cards, you’ll need to demonstrate that you can carry low balances and make timely payments on the products that you’re currently cleared to use. Your credit score will improve with each on-time monthly payment that you make. If you behave responsibly and resist the temptation to approach your admittedly meager credit limits, it’s unlikely that you’ll need to wait a full seven years to qualify for a major mortgage or vehicle loan. Depending upon the circumstances, you may qualify for one within just three or four years of your bankruptcy filing.
Your bankruptcy could turn out to be a watershed moment that reorders your personal finances and marks the beginning of a long period of prosperity. It could also prove to change little about your financial situation. Whether you remember your bankruptcy as the moment that you began to get a grip on your life or as an unpleasant experience that set you back even further is up to you.
Byline: Aaron Gormley understands how devastating it can be to have your credit ruined, which is why he is a big proponent of using K.E.L Credit Repair if you ever find yourself in a credit-related crisis.
© 2012, Aaron. All rights reserved.