Special to the Aroostook Republican
In 2008, nearly 1.1 million Americans filed for bankruptcy. Given the housing crisis, rising unemployment and instability in the markets, the fact that more and more people are drowning in debt shouldn’t surprise anyone. It’s a byproduct of the tough economic times in which we live. So what, really, is bankruptcy, and what does it mean for those who file for it?
Essentially, bankruptcy is the bottom of the financial well — the point at which an individual or business can no longer meet their debt obligations and thereby initiates a legal proceeding to get a fresh financial start.
However, bankruptcy is not truly a fresh financial start. Depending on the type of bankruptcy you file for, you are still going to have financial obligations. Child support and spousal obligations will not be excused, nor will secured loans, such as mortgages and student loans. Also, due to the more stringent regulations, discharging your full debt may not even be an option. You may be placed on a repayment plan. Not to mention that bankruptcy is the absolute worst mark you can have against you on your credit report — and it can stick for up to 10 years.
The message is this: if you can avoid filing for bankruptcy, it is generally in your best interest to do so. That said, this article is about rebuilding your financial life after filing for bankruptcy. It’s hard, but it can be done.
Bankruptcy does not
stay with you forever
For many people, bankruptcy is a personally defeating experience. The good news, though, is that bankruptcy does not stay with you forever. In fact, it may actually be easier to pick up the pieces and start over again than you think.
Obviously, the greatest obstacle you face after filing for bankruptcy is securing a loan or line of credit. The best way to be more credit worthy is to start small, be responsible, and prove that you are capable of using some sort of credit.
It’s difficult for someone who has filed for bankruptcy to open a new credit card, especially in today’s economic climate, but it is possible and essential to achieving long-term financial freedom. Just be prepared for high interest rates, low available balances, and annual fees. Don’t jump at the first credit offer you get just because you are desperate for credit. Go online and do some research. You might be surprised by the options available to you, from prepaid cards to high interest, low balance cards.
Just because you went through a bankruptcy and it can stay on your record for 10 years doesn’t mean you won’t be able to finance a major purchase. Studies show that many people who have qualified for bankruptcy are able to secure a mortgage for a house within 18 to 24 months. Again, rates will likely be higher and lenders will require a larger down payment, but it is another step toward building a positive credit history. Eventually, if you continue to make timely payments and keep your debt to a minimum, you will be able to refinance your home at much more favorable rates.
The key is to be patient. Understand that your number-one goal following a bankruptcy should be to save money — not spend it. And be careful. While you can expect to have to pay higher interest rates for your loans and/or lines of credit, don’t let anyone take advantage of you. Remember, if it’s too good to be true, it probably is.
Bankruptcy is result
of a series of actions
… and inaction
It is easy to look at debt as a “thing,” a monster that enters our lives then consumes us. The reality is that debt is an action. More specifically, debt is the result of a series of our own actions — how we spend our money. Inaction, the inability to pay for what we spend, is what leads to bankruptcy.
So to truly recover from bankruptcy it is critical to ask: what are the series of actions that led to me getting into debt? Because regardless of circumstances, it is important that you assume responsibility for your bankruptcy, then correct the financial behavior that led to it. Most likely, that means major changes, including: spending less; creating and sticking to a budget; saving money for “rainy days”; forgoing or selling any remaining high-cost assets; and setting realistic, long-term goals.
Sure, it sounds easy and obvious. It’s nearly universal for people to say: “I’m not going to get myself into a mess like this again,” but changing behaviors, attitudes and values, even when it comes to money, is more difficult than most people imagine.
However, the payoff is worth it. Because the sooner you learn to set and achieve financial goals, the sooner you can gain control of your financial future.
Cheri Doak of Caribou is senior vice president and retail banking leader at Key Bank. She works out of the Presque Isle office and can be reached at (207) 764-9425 or cheri_doak@keybank.com.
