Life After Bankruptcy: What's Next?
Having to file for bankruptcy is something we all hope we never have to do in our lifetimes. Whether you file for Chapter 13 or Chapter 7, there are repercussions to going through this process. However, like with other setbacks in life, you can recover. There may be different paths to recovery for each form of bankruptcy, but there is always hope!
You may have done everything you can to avoid bankruptcy but those sweet 0% interest credit cards may have gotten the better of you. Or your health or unemployment issues may have taken center stage in recent years, and you were left with no recourse but to declare bankruptcy. When considering your financial future following such an event, you can expect that trying to secure credit for the next 3 to 5 years is going to be tough. Also, you can expect this negative mark to appear on your credit report for the official length of time of 10 years; although sometimes you may get lucky and the time can be reduced to 7-8 years. For those who need to weigh their options further, check out How You Know When It's Time For Bankruptcy.
Bankruptcy And Your Credit History
It’s legal for creditors to keep financial events on your report for 10 years, but that’s not a hard and fast rule. So how does bankruptcy actually affect your credit? It does so by lowering your credit score by 200 +/- points — usually because of late payments on accounts and not just because you filed for bankruptcy. If you find yourself becoming overwhelmed by payments, then this is an ominous sign. This is one symptom that can eventually lead to serious financial consequences for you if you fail to make any changes about your situation.
Now the good news: if during the bankruptcy proceedings, you decide to reaffirm or keep some of your debt and you continue to take responsibility for these loans (e.g. your car loans or house mortgage), then you may have a shot here (to some degree) to preserve your credit score and future credit worth in the eyes of lenders.
Additionally, there will be credit card companies (yes, they are out there) that will solicit you after the bankruptcy. You'll be debt free after all, right? You should certainly be cautious and wary, although you may think of this as a second opportunity to do things the right way. While taking on new credit and applying for a secured credit card can be a way to rebuild your credit history, you'll have to evaluate just how responsible you can be with handling debt all over again. You'll need to tread down this road very carefully because if caution is not heeded, your actions could lead you back down the same path towards bankruptcy. Here's more on how to build good credit (and clean up your bad history).
Bankruptcy And Your Living Situation
For those who have gone through bankruptcy, you may wonder just how your living situation may become affected. If you're a prospective tenant, you may be surprised to know that in many cases, landlords who own individual homes will be open to considering your application: after all, you've got no debt after you've filed for bankruptcy, and you're eager to build up your finances. Your living expenses and rent are surely a high priority for you. On the other hand, you may find it more difficult to deal with some large apartment complexes and management companies that frown upon those with a record. At any rate, you're likely to still find housing, and things may not be as bad as you thought it would be.
Now if you’re a homeowner, reaffirming your mortgage is the sole way to keep your home. Let’s consider the advantages of this move. The most obvious benefit is that you get to keep your home! This helps your credit and puts a roof over your head while keeping your bank or lender happy. But if you do decide to include your mortgage in the bankruptcy, you’ll be handing your home back to the bank and walking away. If you aren’t a homeowner yet, keep in mind that you can get approved for an FHA (HUD insured government loan) mortgage after two years from the date you are discharged from bankruptcy.
Bankruptcy And Your Financial Future
Do keep in mind that you'll need to continue making payments if you have other credit lines, and that you'll need to keep an eagle eye on your credit score. What most people may not realize is that this is precisely what credit monitoring services are intended for. You can best keep track of your FICO credit score by using myFICO products, which offer visibility to the most widely used score that lenders use.
It may take 3 years before you can qualify for a conventional loan once more, and when you do, the credit score requirements will no doubt be pretty stringent. or such loans, you'll typically need a credit score of at least 620 or higher, while you'll need a score of at least 680 to snag the best mortgage rates. For the lowest unsecured personal loan interest rates, you'll need your score to be in this general vicinity. Approval for these various loan scenarios will be up to the underwriter’s discretion. If you’re considering a mortgage after bankruptcy, I would consider talking with a financial advisor or mortgage banker about specific bank guidelines and your specific scenario so you can get a better understanding of your situation.
Given everything that we've discussed, anyone facing bankruptcy can hopefully see that there's light at the end of the tunnel. Recovery from bankruptcy can happen, and will happen if you're diligent, committed, and positive.