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This GFC TV question came to us from Beth, and it's an important one in regard to personal finance, since thousands of households file for bankruptcy each year:
My question that I'd like covered is this: How does a person/couple make the best use of a bankruptcy? More specifically: What are the top priorities when it comes to getting financially educated? When the bankruptcy is discharged, what is the best way to a secure financial future? I'm currently working on an ebook about getting through a bankruptcy. My husband and I filed bankruptcy without having a clue about how it would affect our lives. We honestly did not know how to be bankrupt. Sounds strange I know.
I've done hundreds of hours of reading and I'm just now realizing that a bankruptcy is not a fresh start unless some major work is done inside the time of the plan, and maybe even before filing. It's been quite devastating in all areas.
I've really needed a book to help me emotionally and financially. With information that is never provided by a lawyer. I've yet to find that book so I'm writing it, and I really need some expert advice so I thought this opportunity to hear from you would be awesome!
Thanks Beth! First of all, brilliant idea on writing a book on the topic. I'm not familiar with such a book myself, which might make it an excellent topic for you to take a stab at. And no one could do a better job of it than someone who has gone through it.
There's the legal version of bankruptcy – which I suspect is what most of the published books are about – and the view from the front line, and that's what needs to be covered. Take notes as you go along, and build the book around your real life experience. I think it will be a winner.
Bankruptcy is a broad topic, so let's try and break it down in stages.
Bankruptcy: The Big Picture
The best description of bankruptcy that I've ever heard is that it's a credit timeout. That is, it's a time when the spigot of easy credit is no longer available to you. On a more technical level, it's a legal process that enables you to get out from under certain debts (but not all), providing you with an opportunity to regroup, and to move forward in life without all of the constraints that debt creates.
Basically, it enables you to wipe the debt slate clean, so that you can start fresh. That's the good part.
The darker side is that it can also put you into a financial straitjacket, at least for a time. Upon filing for bankruptcy, certain options will either be closed to you, or very difficult to come by. This can apply to several fronts in your life, including employment, getting new credit, buying or renting a home.
Bankruptcy affects each of these areas in various ways. You need to consider what they are, and what you can do to prepare for them.
Employment After Bankruptcy
First of all, rest assured that you cannot be fired from your job due to a bankruptcy. If they do, you may be able to bring a wrongful discharge lawsuit against them.
The primary issue with employment is applying for a new job with a bankruptcy on your credit report. Government agencies cannot discriminate against you for bankruptcy, but private-sector employers do not have that limitation.
In applying for some jobs, bankruptcy might not matter, particularly if it is a few years old. But in certain jobs, generally those where you are handling money, a bankruptcy may disqualify you. This can include jobs in accounting, bookkeeping, banking, investments, or any position with financial responsibility.
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It's virtually impossible to hide the bankruptcy from an employer. Most job applications specifically ask if you’ve filed for bankruptcy within the last seven years. If you say that you haven't, and the employer discovers that you have, your application will be ended. In addition, a bankruptcy filing will come out when the employer pulls your credit report. A chapter 7 bankruptcy remains on your credit report for up to 10 years, while a chapter 13 stays on for just seven.
If you are considering filing for bankruptcy, you should plan on staying in your current job for as long as you can after-the-fact. Your prospects for gaining new employment will improve as each year passes. If you do need to find a job, the best course of action is to disclose your bankruptcy upfront, and state the reasons why.
The employer may be sympathetic based on your honesty and the reasons behind the bankruptcy. You can also offer that the bankruptcy enabled you to be relieved of financial obligations, enabling you to do your job without being consumed with debt concerns.
Applying for Credit After a Bankruptcy
It's important to understand that while bankruptcy will relieve you of most debts, there are exceptions. In fact there are a total of 19 debts that are not dischargeable. For most people, the most important non-dischargeable debts are student loans, tax debt less than three years old, or unpaid amounts due for child support. But the most common debts, including credit cards, car loans, mortgages, installment loans, business loans, and medical debt, can be discharged.
As to new credit, you may be surprised to learn that there are some lenders who will grant you credit fresh out of bankruptcy. But these are primarily of the subprime variety, that will charge stiff fees and interest rates, and usually for very short-term loans. These include payday loans, and even certain subprime auto loans. You may also get offers for secured credit lines, and eventually unsecured lines with very low credit limits, like $500.
As far as all the pretty mainstream credit cards, with zero rate introductory offers or rewards programs, you can forget about those for a few years. The same will be true for low rate auto loans. If you need to apply for a mortgage, you will typically require a minimum of two years to have passed since the bankruptcy, but it could be longer.
You need to go for a period of time when credit is completely off your radar screen. That means paying by cash, not buying anything that you can't pay cash for, and maintaining a strict habit of saving money regularly.
This point is critical: you need to go from relying on credit, to relying on savings.
Excessive credit use the primary cause of bankruptcy. Saving money is the best solution. You should seize on the bankruptcy as a chance to make this conversion in your life. It will probably be the biggest guarantee that you will never be in a bankruptcy situation again.
Buying or Renting a Home or Apartment After a Bankruptcy
As written above, you will generally need a minimum of two years to pass after your bankruptcy before applying for a mortgage to buy a house. The rules are less standard when it comes to renting. It will depend upon the landlord or the apartment complex as to how it will affect you.
The best strategy when it comes to your housing situation is to stay where you are living for at least two years after the bankruptcy. Generally speaking, once two or three years passed, your chances of getting a rental or a mortgage will improve.
If you absolutely need to find another place to live, renting will be preferred to buying. This is because owning a house brings greater expenses, particularly in regard to repairs and maintenance.
If you need to find a new rental, you may need to have a cosigner on the lease, or be prepared to offer additional security. Offering an extra month or two of security can go a long way toward comforting a nervous landlord.
Filing for bankruptcy should never be taken lightly, or seen as a get-out-of-jail-free card. Yes, it can relieve you of crushing current debts, but it will also create new obstacles in your life. Understand what those obstacles are, and carefully evaluate if that will be better than finding some other way to deal with your current debts.