A bankruptcy isn’t the end of the world. Here’s how to recover from one.
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Non-business bankruptcies have, thankfully, declined consistently every year since 2010. Although that’s good news overall, they are still a problem -- according to the Federal government’s uscourts.gov web site, nearly 768,000 non-business bankruptcies were filed in 2017.
Personal bankruptcy can be devastating for those who declare it. But many come back from it and go on to make a full recovery. Here’s a brief, five-point guide on how to get over a bankruptcy.
1. Identify the cause(s) of the bankruptcy
There is no single cause of personal bankruptcy (or any bankruptcy, come to think of it). Reasons why individuals or families declare include, but are by no means limited to:
- Sudden loss of income (e.g., getting fired from a job)
- Unexpected major illness
- Overwhelming credit card debt
- Avoiding foreclosure on a home
Taking a sober and realistic look at the causes of your bankruptcy is an important first step. It’s necessary to realize the circumstance or behavior that led you to make the declaration, so you can avoid this in the future.
Many of us, for example, are habitual impulse buyers, a tendency made worse by technology allowing us to purchase goods instantly. Look into ways of mitigating or eliminating such habits.
2. Create and stick to a budget
As adults, we don’t like to feel restricted on our activities. In terms of finance, shouldn’t we be allowed to spend what we like, when we like?
No, because that kind of thinking won’t help us bounce back from bankruptcy. Spending more than what you’re making, one way or another, is at the heart of the cause of bankruptcy. So it’s imperative to get this under control.
Creating a budget isn’t hard. First, itemize all your fixed expenses (rent, car payment, student loan installments, etc.). You can then estimate your other outflows such as utilities, grocery purchases, and gas expenditures. Leave a bit of room for unexpected payouts such as car repairs and, if you have room, the occasional spending on luxuries like movie theater tickets.
Once established, do your best to stay within the budget. This might be difficult at first, but the discipline will help you gain control of your finances and tilt the expenses/income balance in favor of the latter.
3. Obtain one or two secured credit cards
Your credit profile will take a serious hit once you declare bankruptcy. So following that, you’ll need to restore it by re-establishing credit.
How to do that? You’ll almost certainly have to start with secured credit cards, which often require cash deposits. On top of that, they usually extend only a limited amount of credit (oftentimes, to the limit of the deposit you made).
This card or cards will be your go-to credit instrument(s). You should use them, but sparingly, for some of your expenses. Do your best to keep utilization -- i.e., your total balance divided by your credit limit -- fairly low; experts counsel around 30% to 35% at most. More importantly, make sure to pay your credit card statements on time, and in full if possible.
If you develop these habits, you’ll see improvements in your credit score which at times can be dramatic.
4. Monitor your credit
Since much of your financial life -- chiefly, whether you can obtain credit -- depends on your credit profile, it’s very much worth the time and trouble to monitor it. This can help you identify factors that affect your score, and need to be changed in order to raise it higher. You can also catch reporting errors (yes, these happen) before they damage your profile too badly.
Happily, many credit cards -- even those pitched to the non-wealthy -- include monthly updates to your credit report, with some even delivering suggestions for how to improve the score. Some banks also offer these monitoring services if you hold an account with them.
If your card or bank doesn’t, you can still get semi-regular updates. All three credit bureaus are obligated to provide one free credit report annually to those who ask. If you’re in this position, stagger your requests so that you’re getting one from each bureau every four months.
5. Beware of financial predators
At the risk of stating the glaringly obvious, there are many predators in the finance industry. These sharks swim around looking for easy meals, i.e. people that have clearly struggled with the expenses/income balance mentioned previously. Those who have gone through bankruptcy are thus obvious targets.
It’s very easy to get sucked into a new financial vortex. Payday lenders are now commonplace, tempting the gullible with easy credit but failing to mention the frequently exorbitant interest they charge. It’s good to remember a very important and valid rule here -- if someone in the financial business offers you a product or service that sounds too good to be true, it probably is.
You should also keep a wary eye on companies and individuals promising to “restore” or “repair” your credit. While some of these services might be legitimate, none can wave a magic wand and boost your score by 200 points.
Recovery from bankruptcy is a step-by-step and often gradual process, and is best achieved by personally committing to good, healthy, financial practices.
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