Bankruptcy promises freedom from your debt, but it comes at a high cost. The economic impact and stigma of a debt discharge can be long-lasting and take years to overcome. It’s possible to rebound from bankruptcy, but it requires patience and a solid strategy to rebuild your financial health.
Bankruptcy Damages Your Financial Health
Understanding the damage bankruptcy can do to your financial health is an excellent place to begin your recovery journey.
- Damages your creditworthiness
- Makes it harder to take on new debt
- Can cause professional and personal embarrassment
- May force you to liquidate your assets (depends on the type of bankruptcy)
Bankruptcy damages your credit score and will stay on your credit report for 7 to 10 years. Even after your score has improved, having a bankruptcy in your past can be reason enough to be denied a loan, credit card or rental housing.
Filing for bankruptcy carries a social stigma that can cause shame and embarrassment for the filer. Many people experience stress and anxiety in the aftermath of a bankruptcy.
To qualify for bankruptcy, you have to submit to a means test to prove that there is no reasonable way for you to pay back the debt. As a result, a judge might order you to liquidate non-exempt assets.
6 Tips to Help You Rebound from Bankruptcy
If you are starting over after a debt discharge, consider these practical steps to help you find your way back to financial stability and wellness.
1. Identify What Led You to Bankruptcy
Take a look at your past habits, decisions and circumstances to determine which ones set you on your path to bankruptcy.
Perhaps you took on too many credit cards, spent beyond your means, or bought a house that you couldn’t afford. Maybe your bankruptcy was the result of a divorce, medical emergency, or job loss.
Understanding what you could control and what was out of your hands is essential. Focus on the things you can do differently now. It’s also helpful to think about preventative measures that could insulate you from a financial crisis in the future.
2. Maintain Non-Bankruptcy Accounts
If you had credit accounts that were exempt from your bankruptcy, take care to maintain them. Making regular payments on existing accounts will improve your payment history and help your credit score.
It can also be helpful to mind your debt-to-income ratio (DTI). Managing your balances and keeping your ratio within the recommended limit is a great way to rebound from bankruptcy.
3. Avoid Scammers and “Bad Credit” Offers
After filing for bankruptcy, it is not uncommon to be targeted by scammers that make all sorts of promises. They will take advantage of your desire to repair your credit or take on new debt by offering things that are too good to be true. Be cautious before giving anyone online your personal and financial information.
You may also notice your inbox filling up with credit card or loan offers promising instant approval. While these are not necessarily scams, they may not be good deals for you. Taking on too much new debt too soon after a discharge can hurt your credit and might hinder your recovery.
4. Get a Secured Credit Card
If you don’t have any existing credit accounts exempt from your bankruptcy, it can help to get a secured credit card. A secured credit card requires a deposit from the cardholder and acts as collateral on the account.
It is common for bankruptcy filers to get this type of account as a way to reset their credit history. It poses less risk for the lender and can be a way to demonstrate your ability to make regular payments. Also, using the card and paying down the balance every month establishes good habits which will serve you well in the future.
5. Focus on Credit Mix
Your credit score should see improvement within 6 to 12 months after your bankruptcy. However, achieving an excellent score will take much longer.
If your credit score has stalled, but you are maintaining a good payment history and are keeping your debt-to-income ratio low, it might be helpful to focus on credit mix. A good credit mix means having a variety of accounts rather than too many of one type.
Credit mix makes up 10% of your score and shows lenders that you can handle different types of debt i.e. car loans, mortgages, personal loans, credit cards, utilities, etc.
6. Maintain Job Security
Changing jobs too frequently while recovering from bankruptcy can make you look like a liability to lenders and landlords. On the other hand, staying in a stable position can work in your favor.
Additionally, while bankruptcy is not just cause for an employer to fire you, it can make it more challenging to get a new job. When you authorize a background check, an employer can see if you have a history of bankruptcy. If you are trying to get a finance position or work in an industry that requires you to be responsible for money, bankruptcy could impact your chances of being hired.
Avoid These Missteps Which Can Make Recovery Harder
Rushing your bankruptcy recovery or trying to take on new debts too soon can derail your recovery efforts.
Although it can be tempting to give in to old habits or not stick to your recovery plan, it helps to be patient with the process. To avoid missteps or setbacks, remember that less is more and patience is key.
Avoid These Mistakes During Your Recovery
- Repeating bad habits
- Not following a plan
- Taking on new debt too soon
Alternatives to Bankruptcy
Bankruptcy is a serious decision that should be a last resort. Before choosing this path, it’s a great idea to look into all debt relief options. Debt settlement and debt consolidation are two of the most common alternatives to bankruptcy.
If you are considering bankruptcy and want to explore your options, contact a Certified Debt Specialist to learn more.