Life After Bankruptcy

How Will Bankruptcy Affect Your Financial Life?

Dear Chris,

I am contemplating bankruptcy, after 4 years of debilitating health problems and unemployment following a poisoning.

I had hoped to regain health to begin working, but chemical sensitivities are preventing that from occuring.

Can you give me specific examples about life after bankruptcy, such as a scenario about how a credit score looks right after and how it may actually improve after bankruptcy is granted. (I read that ultimately it is better than being over extended with late payment dings on one's credit report.)

Also, can you give examples (numbers) of the cost of credit after bankruptcy? I understand that information would be a generalization and specific numbers reflect each person's history.

I just want an idea about the limitations and hardships in going forward after a bankruptcy.

Thanks in advance.

Ann

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There are too many variables for me to predict exactly what life will be like after you get a bankruptcy discharge.

Depending on your credit score now, creditors may offer you unsecured credit cards immediately after bankruptcy. They know you can’t go bankrupt again for eight years, you will likely have more disposable income, since your debts were discharged and, as you noted, your credit score can actually go up after a bankruptcy.

But this credit will not be cheap. I would expect you will be charged interest in the area of 24 – 30%. There will also be draconian late fees and penalties. If you accept one of these cards, use it sparingly and make sure you repay your entire balance monthly. At these rates it will take forever to pay off your debts.

If you don’t qualify for unsecured credit, you can start to rebuild your credit with a secured card. You make a deposit to a bank, which will give you a line of credit based on that deposit. Even though this is secured debt, it isn’t cheap. Shop around for the best deals. Bad Credit Cards lists some surprisingly affordable ones.

Make sure the bank will report your on-time payments to the credit bureaus and that it will convert you to an unsecured card within a year or so, if you make your payments on time.

If you are shopping for a car, you will pay somewhere between 21 and 24% interest. Again, at these rates, you might have a hard time repaying your debts.

You might not qualify for a mortgage right away, but if you fight to restore your credit score, you should be able to qualify for a FHA mortgage in 2 to 3 years. You will pay between .5% and 2.5% more in interest, depending on credit score, employment history, etc. Depending on the amount you borrow, this will likely add several hundred dollars a month to your payments.

You might have trouble renting a house or apartment, your auto premiums might rise and your ability to get a job might be affected. I really can’t be very specific since it depends on the actions of potential landlords, auto insurance companies and employers, who may or may not look at your credit report and decide not to deal with you or charge you more because of the bankruptcy.

Experts say that it you handle debt carefully and repay your bills on time, you can approach a “prime” credit score in 3 to 5 years. So only use 20 – 25% of whatever credit is available to you and make sure you are always on time with your payments.

I’m sorry I can’t be more exact.

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