Filing bankruptcy is one of those gut-wrenching decisions that aren’t made without a lot of cold, hard realizations. Then, an aggressive game plan to pick up the pieces is necessary.
When we take legal steps to ease our financial burden, those decisions are made with full awareness that it’s going to cost far more than just a few hundred dollars to a bankruptcy attorney and a morning spent in a courtroom of others who came to the same realization that they were in too deep. But there are other long term repercussions, too.
The Economic Factor
If you’ve watched the news this week, odds are, you’ve heard the pundits ooh and aah over the economy and it’s certain improvements. While there is good news when it comes to the economy, most obvious being the new Dow record high that was set on Tuesday on Wall Street. Home prices are rising, we’re learning to trust a bit more in an imperfect financial sector and of course, there are those who say it’s improving because their favorite news host told them so. Ah – but that’s not the whole story and it’s entirely possible people won’t realize this until the bottom drops out. Remember, the record that was broken with the stock market was initially set in 2007 – weeks and months before the bottom fell out, the banks failed, the government bailed them out, subprime mortgages hit hard and soon, the recession. A healthy dose of caution is always a good thing.
Unemployment is stubbornly high and more than 1.2 million Americans filed for bankruptcy last year. Not only that, but 15% of American workers are in positions that classify them as underemployed. All of these years of tough breaks, job losses, foreclosures, late payments and devastating credit reports, many have no other option than to file for bankruptcy. Their fears are they will struggle even after they’re under bankruptcy protection. Years ago, they’d be right. Today, though, there are ways to rebuild credit. Discipline is key.
Actually, to move forward believing you don’t need to rebuild your credit because there are no guarantees is a bit shortsighted. Never before have our credit histories been more important. There was a time when a credit card company or bank would pull our credit reports once – and that was during the approval process. Now, though, those same companies and banks are looking at our credit reports many times throughout the course of our loans. They’re using the information they find to either raise our interest rates or our credit lines. To assume it’s not necessary to rebuild is a big mistake.
Those with recent bankruptcies are considered “subprime”, which in short means you’re going to pay more for credit for quite some time. There’s no way around it either – you can’t simply wait a decade for the bankruptcy to fall off. If you buy insurance – of any kind, including car, life or health – you’re going to need a score that can be evaluated. And forget about buying a house with no credit. It won’t happen.
Not only that, but it’s only been recently that good credit is no longer found at the 625 mark; instead, consumers aren’t considered good credit risks unless they’re hovering near the 700 mark.
So what are the answers and how can a consumer rebuild his credit and his life after bankruptcy? Secured credit cards are likely going to be the first answer any credit counselor gives an inquiring consumer. Remember – there’s a difference in prepaid cards and secured cards. There are a lot of reasons these are the ideal solution for the short term – and in many instances, the long haul too.
A secured credit card can be a good payment method as well as a powerful tool that can help you rebuild your credit. Like a prepaid card, if you deposit $100 to your card, your credit limit becomes $100. The difference is when you charge $50 on a prepaid card, it’s actually deducted from that $100. With a secured credit card, it’s not deducted, but instead, you pay the $50 back when you receive the statement. With a prepaid card, you’re using your money and with secured credit card, you’re using the bank’s money and that is what gets reported to the bureaus. Also, the fee structures are almost always more affordable than prepaid cards – which, by the way, aren’t held to the same compliance laws as other financial products.
Often, a retail card or gas card can get you on your way too. The interest is higher, but the approval process is generally lower, which will allow you to begin rebuilding. The kicker is, though, you have to use them so that there’s activity to report. That means you’ll have to pay higher interest – unless, of course, you pay your balance in full each month. Ah – but then there’s the realization that if you do pay that balance in full, there’s really no way to see a consistent payment history unless you’re charging each month. It’s the proverbial rock and a hard place. You’re going to have to spend money to rebuild your credit. It’s that simple.
Proceed with Caution
A word of caution though – it’s the banks that issue all types of credit cards, so you stand a good chance of being denied a card if it’s being issued by a bank you filed against in your bankruptcy. That’s not always the case, but you should be aware of that possibility.
In the end though, bankruptcy doesn’t have the same stigma it once had. That’s likely because more people in recent years have found themselves against the wall from a financial standpoint. People who, at one time, were doing quite well found themselves struggling in a weakening economy. Many lost their jobs and homes and many found themselves falling victim to illegal bankers and investors. It’s not easy rebuilding, but it is possible to put it behind you faster than the seven to ten years it used to take.