Is There Life After Bankruptcy?

Is there life after bankruptcy? Many people facing the prospect of bankruptcy feel hopeless, like they will never live a life without debt. Culturally, they may see bankruptcy as “the end” or as a sign of failure. But life goes on – and in fact gets better – after a bankruptcy discharge. Understanding the truth about the consequences of claiming bankruptcy and what comes afterward is key to using this powerful tool to live a life free from unmanageable debt.

Bankruptcy Lets You Breakup With Your Debt

Over time, many Connecticut individuals and families develop an odd relationship with debt:

• Spending more than they earn.
• Paying the minimum due each month on credit cards.
• Unrealistically clinging to hope that the balance will be paid off someday.
• Transferring balances to lower interest cards.
• Making friends with debt!

Over time, it can be easy for this toxic relationship with debt to feel normal. They may even assume that it is natural and right for their family to go without, spending all their money to pay down high credit balances while others around them gather assets, buy homes and vehicles, and gather wealth.

But you don’t have to be married to your debt. A Chapter 7 liquidation bankruptcy or Chapter 13 wage earner reorganization bankruptcy can offer you and your family a fresh start, without the baggage of a bad relationship with your debt.

One of the Worst Things You Can Do….

…Is not seriously considering bankruptcy when you first see the “writing on the wall”, even if you are making current minimum payments every month. To avoid the specter of bankruptcy many people employ a debt consolidation service. When these don’t require a large up-front payment, they still tend to be ineffective, in my experience. Worse would be liquidating your retirement assets to pay off debts. Retirement accounts like 401Ks and IRAs are fully protected, or “exempt” in bankruptcy, while credit card debt is easily discharged. The potential growth lost by liquidating a retirement account can be huge. If you’ve already made these mistakes, bankruptcy may still help.

What are the Consequences of Claiming Bankruptcy?

Bankruptcy is the legal process where a debtor (individually or as a married couple) can ask the bankruptcy court to discharge some or all of their debt. In Chapter 13 you will propose a plan providing that your disposable income will go toward paying off some fraction of your debt. For most families considering bankruptcy, that was already true before they filed. In most chapter 7 cases a discharge is obtained without paying any of the debts and in most cases no assets are lost to the bankruptcy process.

But many people are naturally reluctant to consider bankruptcy because they are worried about the effect it will have on their credit score. There is some reason for that, as a bankruptcy petition will appear on your credit history for seven to ten years after the filing date. However, other factors, including high balances, frequent credit checks and missed payments can have a larger effect. The baseline is what your credit score will be if you don’t file bankruptcy, not some imaginary state of perfection. In fact, many people achieve a markedly improved credit score after emerging from bankruptcy. If you make smart decisions in your life after bankruptcy, you can rebuild your credit and develop a healthier relationship with debt. Bankruptcy is a fresh start, not the finish line.

How Do You Recover from Bankruptcy?

Your success in life after bankruptcy depends on your commitment to changing your relationship with debt. While modern living often does require some form of credit card to reserve hotel rooms or buy a plane ticket, if you learn from the bankruptcy process, you can limit your need to rely on credit and transition to living on a cash basis. There will always be available credit, even after bankruptcy, but the key can be as simple as making sure you spend less than your disposable income and pay off your credit balances every month as they come due. This will give you more control over your money, and reduce the stress of managing your financial affairs. Here are some tips.

Take Your Financial Management Course to Heart

Every bankruptcy petitioner is required to complete a financial management course before their bankruptcy is discharged. This course, usually completed online, can provide you with helpful tools for budgeting, managing your finances, and making smart decisions with your money and your credit. By practicing the strategies taught in this course, you can break any bad habits that may have gotten you into trouble in the first place, and help you develop a better relationship with your money in your life after bankruptcy.

Keep Copies of Your Bankruptcy Discharge Paperwork

The end of a Chapter 7 bankruptcy results in the filing of bankruptcy discharge paperwork. This court order forgives any unpaid dischargeable debts that existed on the date you filed (the “petition date”). But you don’t want to put the bankruptcy so far behind you that you can’t find proof of it when you need to. As you live your life after bankruptcy, you may need to provide documentation to mortgage lenders, banks, or other creditors in the future. You may also need to provide proof of discharge if a creditor comes calling, or even files a collections action after the bankruptcy is final, although such occurrences are rare.

Be Strategic About Rebuilding Credit

To make the most of your life after bankruptcy, you will want to rebuild your credit to minimize the impact of your bankruptcy petition on your ability to get a loan when you need it. While it is possible to live without credit at all, you will likely need to obtain credit to:

• Buy a vehicle
• Purchase a home
• Send your children to college
• Pay for a medical procedure or emergency
• Rebuild after a natural disaster
• Make hotel or plane reservations

This means you should make rebuilding your credit a priority. Continue making payments on time (or early) on any secured or non-dischargeable debts that survive the bankruptcy process. Then consider opening a single credit card account to show creditors (and the four credit bureaus) that you have learned how to manage your debts.

Many people do not know that the credit card industry has a niche marketing to people who have recently obtained a bankruptcy discharge. If you are careful, charge only what you can pay off each month, and schedule recurring payments, you will be able to re-build a decent credit score (low-to-mid 700s) within a relatively short time and with consistency, a perfect credit score is eventually within reach.

Get Help Planning for Life After Bankruptcy from an Experienced Connecticut Bankruptcy Attorney

Life doesn’t end with bankruptcy. By using the right bankruptcy tools and committing to a new relationship with debt, you can rebuild your credit and live well soon after the case is complete. At Lawrence & Jurkiewicz, we focus our practice on helping people. We know that you may be nervous in deciding whether to file for bankruptcy, and we want to help you get a fresh start, and will help you develop strategies to make the most of it. Please contact us or call (860) 264-1551 for a free consultation.