Bankruptcy: Rebooting Your Credit Life

By May 5, 2017Bankruptcy

For many people, bankruptcy is a scary concept, something to be avoided at all costs. However, the truth is that legal bankruptcy can relieve you of major financial burdens and allow you to begin planning a debt-free future.


Two Types of Bankruptcy

In essence, declaring bankruptcy is a way of telling the United States court system that you can’t currently pay your debts. There are two main kinds of bankruptcy for individuals (as opposed to businesses). A Chapter 13 bankruptcy lets you negotiate with your lenders and come up with new payment plans that you can manage. In most cases, people must make all of their payments within five years.

If you don’t have much in the way of disposable income, a Chapter 7 bankruptcy may be the option for you. Unfortunately, it will require you to sell or cash in some of your assets in order to pay certain bills. On the bright side, this measure will eliminate some of your debts ― medical bills, for instance ― so you can forget about them entirely.

The Procedure

If you’ve decided to file for bankruptcy, your first task is to find a lawyer you can afford. That attorney will explain all of the details of the process. She’ll also supply you with the forms you’ll need and help you to complete them correctly.

Later, you’ll have to appear in court at a 341 hearing, which some or all of your creditors may attend. There, you’ll discuss your debts and assets. If you’re going through a Chapter 7 bankruptcy, your debtors’ official representative, who’s known as the bankruptcy trustee, will help figure out which of your possessions you’ll be required to liquidate.

As part of your bankruptcy responsibilities, you’ll need to take a class that will review methods for handling your personal finances. In addition, you should know that, under the law, your boss isn’t allowed to fire you merely because you’ve declared bankruptcy.

Next Steps

Once your bankruptcy is behind you, a good first step is to carefully prepare a budget for yourself. Make a thorough list of your monthly expenses and compare it to your monthly income. Of course, you should be spending significantly less than you’re making so you can grow your savings and build up an emergency fund. If you’re spending too much each month, do whatever you must to reduce your expenditures, increase your income or both.

For example, you might look for a job that pays more, or even get a second job. You could move to a cheaper apartment, or you could sell your home and buy one that’s smaller and more affordable. Why not give up golf, forego cable TV or start using less smartphone data? Whatever you can think of to get on solid financial footing, take that action at once.

If you obtain a secured credit card with low fees, using it in moderation should help you to raise your credit score.

Especially important, make sure that you pay every bill on time. It’s worthwhile to set up as many automatic electronic payments as you can. That way, you’ll be less likely to forget to pay a bill. Also, keep checking the bank accounts from which your automatic payments come. Obviously, you don’t want to overdraw from one of them.

When it comes to the bills you can’t automate, try using an app or an old-fashioned calendar to remind yourself of due dates. Moreover, make each of those payments several days before they’re due. You don’t want unforeseen circumstances to somehow prevent you from paying on time.

The services of an excellent credit repair company can likewise enhance your credit report. Such a firm will scrutinize your credit history, find mistakes that are hurting your score and contact the proper credit reporting agencies to get them erased.

As time goes by, keep reviewing copies of your credit reports. If you ever spot a sudden drop in your score, you could get in touch with a credit repair company to see if an error was involved.

A Tricky Decision

It probably goes without saying that bankruptcies aren’t entirely positive. This legal process will damage your credit score, and a bankruptcy notice will stay on your credit record for a full 10 years. And, even though there’s no reason to, you may experience some lingering feelings of failure or shame after you file for bankruptcy.

However, these days, lenders tend to be more lenient with those who’ve declared bankruptcy than they once were, especially people who’ve only gone bankrupt one time. Thus, you shouldn’t expect that you’ll have to pay enormous interest rates for all of your future loans. In some cases, though, you might be required to explain to potential creditors why you chose to declare bankruptcy.

In the final analysis, bankruptcy is certainly a serious and consequential action. At the same time, it can be a uniquely valuable tool for those who find themselves in difficult financial situations. Many people are able to turn their lives around as soon as they take this step.



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