The decision to file for bankruptcy is never one that is made lightly. Many times, people agonize over whether to file for a long time before concluding it is in their best interest.
Last year, more than 500,000 personal bankruptcies were filed in the United States. That reflects a huge drop from the previous year, which had more than 750,000 bankruptcies. Though 2021 may still have fewer than average filings, the numbers are expected to creep back up again in 2022 after the end of stimulus checks, eviction moratoriums, and mortgage forbearance truly hits. Needless to say, if you filed for bankruptcy or are thinking about it, you are not alone.
Personal bankruptcies are usually filed under Chapter 7 or Chapter 13. About 90% of Iowa bankruptcies are filed under Chapter 7, also known as liquidation bankruptcy. Most unsecured debt is discharged, such as credit cards, medical bills, and some personal loans. Removing these from your monthly financial burden allows you to press the reset button and move forward.
After bankruptcy, taking steps to ensure you don’t end up in similar dire straits is priority No. 1.
Make a Budget and Stick to It
The “B” word can send shivers down some people’s spines, but having a budget based on your true income and expenses is the best way to keep above water financially. Take into account all of your income – wages, child and spousal support, and any other regular payments you receive. Also itemize all your regular expenses – rent, groceries, utilities, car loan, insurance, court-ordered payments, and anything else you pay out regularly on a monthly, quarterly, or annual basis. Include a line item for emergencies.
Making the budget is critical but won’t do much good if you do not adhere to it. Keep track of where your money goes and adjust when either income or expenses change.
Review Your Credit Report
Ask for a copy of your credit report. The Federal Trade Commission entitles you to a free copy of your credit report from the three nationwide reporting companies (Equifax, Experian, TransUnion) each year. You can order the report online or by calling (877) 322-8228. Check the report for accuracy and dispute anything you believe is incorrect. Also, check for accounts that you have jointly with someone else (like an ex) as well as any accounts where others are listed as authorized users. You will want to close joint accounts so another person cannot drag down your creditworthiness. Remove people as authorized users that should not remain on accounts.
Open a Secured Credit Card
Unlike a traditional credit card, a secured credit card is opened by making a cash security deposit. The credit limit is generally the amount you deposit. Making small purchases then paying off balances on time will help rebuild your credit. Keep your credit utilization (outstanding balance vs. credit limit) to below 30%.
Pay Your Bills on Time
From credit cards to utility bills, paying bills on time demonstrate financial responsibility to lenders and creditors. On-time payments also mean you won’t be responsible for late fees and other penalties.
Consider a Credit-Builder Loan
A credit-builder loan is unlike a traditional loan. It is more like a forced savings account. You make monthly payments to the lender who holds that money in the account. These “loans” generally come in increments of $300 to $1,000. Choose a payment amount you know you can make over six months to two years. You don’t have access to the money you have paid until the end of the specific time frame. Make sure you understand any interest or other fees you will have to pay. Once again, making timely payments will boost your creditworthiness.
Have Payments Reported to Credit Bureaus
Not all creditors and lenders report your activity to the three credit bureaus. When you open a new account of any kind, ask whether they send your payment history to the reporting agencies. If not, your new dedication to making on-time payments will not affect your credit score and creditworthiness and will not show on your credit report. Pick lenders and creditors that report so your payment faithfulness positively impacts your credit score.
Save for Emergencies
Saving for emergencies is difficult for everyone. According to the Federal Reserve, more than 35% of adults don’t have enough cash to cover an unexpected $400 expense. That means emergencies are often paid for in full or part by credit cards and loans. Unexpected costs can be the beginning of a downward spiral. Saving monthly can keep you on firmer ground. Most experts believe everyone should deposit 20% of their monthly income in savings.
The road that led to bankruptcy probably didn’t happen overnight. Likewise, rebuilding your credit card will take time. Consistent, small steps will make a difference. You may see a small credit score boost after some debts are off your credit report, but it will take 18 months or longer to impact your creditworthiness more fully.
Ask for Bankruptcy Advice
If you are struggling to pay your bills, an experienced attorney at Hope Law Firm can assess your financial situation to determine whether bankruptcy is in your best interest. We can discuss with you’re the pros and cons of Chapter 7 and Chapter 13, which chapter fits your situation, and any other questions you have about the next steps.