Life after bankruptcy -- how to get your finances back on track
More than 600,000 new bankruptcy cases were filed in the first half of 2012. If you were one of them, it may feel like your financial future is doomed.
Not so, says the Minnesota Society of CPAs (MNCPA). While you will face challenges post-bankruptcy, you can chart a new financial course with a commitment to educating yourself, becoming more disciplined with your money and credit, and learning some valuable lessons.
Bankruptcy fact versus fiction
Don't let every scary bankruptcy story you've ever heard keep you from moving forward. Many people think they can never get another credit card, be approved for a loan of any kind, or qualify for a mortgage.
It's true that it may be more challenging, but you can still qualify for a Federal Housing Administration (FHA) home loan, which is government insured. Such loans aren't based on your credit.
By law, the maximum time that a bankruptcy can stay on your credit record is 10 years, but the credit agencies will often expunge it long before then. If you have a steady income, your debt ratio is low, and you're rebuilding your credit, banks may be willing to lend to you.
And you may be surprised at how many credit card offers you'll still receive. One study showed that 96 percent of consumers were offered new credit within a year of declaring bankruptcy.
Tips for getting back on track
Now you know the good news - all avenues of credit aren't cut off to you forever - but now you need to take some steps to get yourself back on the road to financial recovery. Here's what the experts recommend:
Think about it. Yes, you declared bankruptcy. Now you need to pull yourself up by the proverbial bootstraps and move on. What got you into this situation in the first place? What do you need to do differently now?
Create a realistic budget and spending plan and stick to it. You need to spend less and save more. Where can you cut costs? When you need something, buy it with cash. Don't run yourself back into debt. When you are able to obtain a new credit card, use it sparingly with the intent of rebuilding a strong credit history. Live below your means.
Pay bills on time. You are working to reestablish your credit. Make sure that you pay bills on time, every time. You don't want any of those special little notes in your credit report. Prioritize your expenses to stay on track.
Know your obligations. Many people are under the impression that declaring bankruptcy absolves them of their debt. Not true. You may still be responsible for paying off creditors. Factor these payments into your budget.
Save. And then save some more. It's time to create an emergency fund so that unexpected financial crises don't derail your attempts to get your credit back on track. Experts suggest having enough in the bank to cover at least three to six months of expenses in case of emergency.
Ease back into credit. You'll receive a surprising number of credit card offers, but don't jump at the first one. Pay close attention to the type of card being offered, the fees, and the terms.
Monitor your credit. Your whole goal after bankruptcy is to get yourself back into good financial standing. Take an active role. Monitor your credit reports (you are entitled to view your credit report for free every six months). If you see anything that seems incorrect, notify creditors and the credit bureau immediately to remedy the situation. Remember, the information in your credit report will be used by banks and lenders to determine the amount of credit they will extend and interest rates on loans.
Watch out. Unfortunately, there are unscrupulous people out there waiting to take advantage of people who are in dire financial straits. They'll offer to "fix" your credit, but that will, of course, come at a price. Look out for too-good-to-be-true offers. Your best bet is to work to reestablish your credit through your own hard work. If you do work with a company, check their credentials carefully.