There’s a familiar—and dangerous—cycle I regularly see with regard to debt and bankruptcy relief. Many people come to the conclusion that they’re carrying more debt than they can afford, so they file for bankruptcy, get relief from those debts under and then fall into the same debt-incurring behavior. Eight years pass (the legal period between filing for another Chapter 7 bankruptcy) and, because they lack any other options, they once again file for debt relief. This “bankruptcy trap” is a terrible spot to find yourself in and I advise clients to do everything possible to avoid it.
If you’ve experienced this situation and want to make some serious changes in your life, here are options for improving your chances of breaking the cycle:
Take the required classes in credit counseling seriously. Since 2005, it’s been mandatory in California that anyone seeking bankruptcy relief must attend two required classes. The first class, on credit counseling, actually takes place before your bankruptcy filing. In this class, counselors offer informal opinions about what course of action might be most beneficial for you—applying for debt relief, working out a household budget, etc. While in most cases, filing for bankruptcy is inevitable, I believe there’s value in getting a third party to objectively assess your situation.
The second class, taken during the bankruptcy process, is called a “debtor education class.” Individuals learn about moving forward following bankruptcy, receiving valuable advice on budgeting, rebuilding credit and avoiding credit scams and other pitfalls. I urge my clients—and anyone else in the same situation who reads this post—to take these classes very seriously. They can be very useful in helping you turn your life around.
Design a sensible budget. When you file for bankruptcy (especially Chapter 7), you’re showing the court that your net income is insufficient to pay your reasonable expenses. Chapter 7 helps you eliminate substantial debt, but you still walk out of the process with that same budget. Now it’s time to reassess your expenses, which is easier to do than reassessing your income. What expenses can you get rid of and what anti anxiety expenses should be paid first? Sticking to a sensible budget plan will take you a long way toward financial stability.
Schedule your payments. It’s vitally important to pay your bills on time, since prompt payment makes up a key portion of your credit score. Missing payments negatively affects that credit score and limits your opportunities to bounce back from bankruptcy. On the other hand, making payments on time improves your credit score, which in turn makes future credit opportunities easier to attain—and often with lower interest rates. This can be very helpful when the time comes to apply for a car loan or mortgage.
Apply for credit. Many people mistakenly believe that if they file for bankruptcy, they’ll never be able to get a credit card again. On the contrary—credit card companies will see you as a “clean slate,” and do everything they can to get your credit card application. It’s OK to apply for a new credit card, as long as you read the fine print. Many so-called credit card opportunities come with astronomically high interest charges attached (as high as 25-30% annual rates!). Signing up for one of those will only send you back down the path to debt.
Fortunately, by doing your due diligence, you may find yourself eligible for lower interest-rate credit cards or a secured or pre-paid credit card. When you stay on top of your payment schedule, the bank (or other entity) that offers the card will report those positive payments—thus affecting your credit score in a positive way. Then you’re on the way to establishing your good credit.
Be smart. Know your limits. Create and maintain a workable budget. Then you’re much less likely to fall prey to the dreaded bankruptcy trap.
Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.