Life After Bankruptcy

September 07, 2011

The worst of the recent economic recession may be behind us, but the ripple effect of its devastation lingers.  Whether it’s repossessions, foreclosures, or bankruptcy, good, hard working Americans are still struggling to dig out of the mess, and recent and future unexpected events (such as Hurricane Irene) will only pour salt on the financial wound.

Amid these tough times, it is important to maintain a sense of perspective.  Recently I spoke with a person who, while trying desperately to regain her financial footing, is still feeling the weight of her circumstances.  With a sense of defeat, she asks, “Is bankruptcy my only option?”  For some, sadly, the answer is “yes,” but what we all need to understand is that bankruptcy is not the end of the world.  In fact, for many, it may be exactly what they need to really get back on their feet again.  Here are some truths about bankruptcy we all need to remember:

Bankruptcy is not the “easy way out”

Sometimes we have the impression that people only choose bankruptcy because it’s “easier” than fighting to regain your financial reputation.  I appreciate anyone who is compelled to really do what it takes to avoid bankruptcy, but even financial talk show host, Dave Ramsey, had to declare bankruptcy, and I can’t think of anyone who’s more financially tough than him.  (Just for the record, Dave Ramsey does NOT advocate bankruptcy.)

The truth is good, decent people run into bad luck all the time, and while it may be an unfortunate consequence of decisions that were made, it is NOT an easy decision to declare bankruptcy.

Bankruptcy is not an immoral decision

I’ve told you about my neighbor Mrs. P.  Mrs. P is in a difficult financial situation, but she has vowed not to consider bankruptcy because she has a strong conviction that you “pay back what you owe.”  I agree, as I’m sure most of you reading this do as well, and we know that most of us never borrow without the intention of paying it back (although I’ve been told there is a Real Housewife of New Jersey that doesn’t share this philosophy), but remember this: you’re allowed to pay back your creditors even if the debt has been forgiven.  If you feel that strongly about “paying it back,” bankruptcy can buy you the time to get your financial house in order so that you ARE able to repay your financial obligations.

There is life after bankruptcy

Here’s the harsh reality:

  • Bankruptcy remains on your credit report for 10 years, but it remains part of your credit history forever.
  • It can take several years to rebuild your credit, but it may take several more years before you are able to borrow money again (at least at a decent interest rate).

Here’s how to overcome it:

  • Build up an emergency fund – set aside $20 a week for the next 12 months and you’ll have $1,000 saved for unexpected expenses.
  • Pay your bills on time – I know it’s obvious, but bankruptcy gives you RELIEF, so don’t abuse it.  Use the relief to get your head above water, to save up in an emergency fund, and to pay back your creditors if you are so inclined.  Also, paying your bills on time is the best way to rebuild your credit.
  • Learn to live without credit – think about what may have caused your situation and decide if there are things you can change that will help avoid it from happening again in the future.

Without question there are many that ended up in the situation they are in because of circumstances way beyond their control.  For that reason, bankruptcy exists.  It should be viewed as a last resort, but know that it is there to protect you when you have exhausted all of your other options.  Ironically, it could be the best financial decision you ever make.