Filing bankruptcy is a major financial decision not to be entered into lightly. However, because of the high unemployment rate and weak economy, more Americans are faced with the need to file bankruptcy. Filing bankruptcy is not a dead end; however, it will take years to rebuild your credit score and feel comfortable with applying for credit. A bankruptcy stays on your credit report for ten years and deters most lenders from extending credit for the years immediately following the filing of a bankruptcy. However, there will be lenders who will extend credit, some almost immediately, to debtors after they are discharged and their bankruptcy case is closed. This credit will come at a high price in the form of interest rates. Lenders try to protect themselves and lower their risk of lending to people who have filed bankruptcy by charging increased interest rates. Lenders are aware that bankrupt clients have a limited number of resources for credit after the case has been closed; therefore, they know people will pay the higher interest rate to obtain a loan.
You can protect yourself from paying these high interest rates by staying away from credit after filing bankruptcy. Furthermore, you rebuild your credit score by continuing to pay mortgage payments, rent payments and car payments before their due date. For those individuals who feel they must have a credit card once their bankruptcy case is closed, they should search for a credit card with the lowest interest rate they can obtain, a very low maximum balance and they should pay the full amount charged within 60 days of the date charged. This will also help rebuild your credit score but you must be careful not to get back into the same situation you were prior to filing bankruptcy.
However, the most important thing you can do after filing bankruptcy is to establish an emergency fund for unexpected expenses. Open a savings account, begin depositing a set amount per pay period into the account, and leave it alone. The point of an emergency account is that you only use the funds in case of an unexpected catastrophe. Emergencies do not include last-minute vacations, trips to the hair salon, designer shoes or sports tickets. The account should be used for emergencies such as unexpected car repairs (flat tire, broken hoses, etc.), home repairs (hot water heater breaks, refrigerator stops working, etc.) and medical needs. Having an emergency fund will decrease the need for you to obtain credit at a high interest rate or start down the path to bankruptcy again (which you cannot file for at least 8 years after filing the last bankruptcy case).
In Chapter 7 bankruptcy cases and Chapter 13 bankruptcy cases, having an emergency fund is necessary for different reasons.
Chapter 7 cases – When you file a Chapter 7 bankruptcy case, you cannot borrow money during the pendency of the case. This may be as short as 6 months from the date of filing or as long as a year or more depending on your particular case. Begin saving money as soon after you file your case as your attorney advises and continue to do so after your case has ended. Once your case has ended, you can apply for credit; however, if you are approved (no guarantee) then it will cost you more in interest. It is better to have an emergency fund to use rather than pay high interest rates or be without a means to get credit at all.
Chapter 13 cases – During a Chapter 13 bankruptcy case, the debtor makes monthly payments to a trustee who then pays the creditors what they are owed or a portion thereof. During the Chapter 13 case, typically 5 years, the debtor is not allowed to obtain credit of any type without court approval. If a person must have credit to purchase another vehicle or a home, they must have their attorney petition the court and obtain approval prior to executing loan documents. The court reviews each motion and only grants those that, in its opinion, are in the best interest of all parties concerned. Typically, motions to incur debt are not filed for such expenses as car repairs, home repairs, braces, etc. That is when an emergency fund becomes very important to someone under Chapter 13 bankruptcy. Unlike a Chapter 7, a Chapter 13 case will go on for 5 years and the debtor cannot obtain credit without the necessity of paying their attorney to file a motion with the court and having a hearing to get approval. An emergency fund to cover unexpected expenses is necessary for a Chapter 13 debtor or he or she will constantly be struggling to stay afloat.
Bankruptcy is considered a “fresh start” – a chance to repair the damage to your credit and work toward financial stability. Begin this road by maintaining an emergency fund for the things life throws at us unexpectedly.
NOTICE: Nothing in this article should be construed as legal advice nor is it intended to replace the legal opinion of an attorney.