The biggest mistakes people make after bankruptcy
1. Avoiding credit – I understand why some people want to avoid credit – they equate it with pain. But it wasn’t the credit or credit card that got you into trouble, it was the accumulation of debt that couldn’t be paid.
If you can responsibly own sharp knives, you can responsibly carry a credit card. It’s just about conscious personal responsibility.
If you shun credit after bankruptcy, it’s only going to slow the rebuilding of your credit score. And a better credit score leads to lower-cost loans, insurance, and other things.
2. Avoiding credit cards – See above for some of the reasons. Too many people think debit cards are somehow better than credit cards. From a safety of use and a consumer protection point of view, that’s not supported by the facts.
- A debit card is not regulated by the same laws that protect credit card use.
- A mistake in a debit card transaction comes right out of your bank account.
- When you give someone your debit card you are giving them electronic access to your money.
- Debit cards don’t build credit.
- If you have the money to pay for something with a debit card, you have the money to pay for it on a credit card.
- Debit card overdrafts result in some of the most expensive credit around. Even more expensive than a payday loan.
3. Not looking at your credit report – A month or so after you receive your final bankruptcy discharge, get copies of your credit reports.
The consolidated credit report I prefer comes with a fee, but in my experience its format makes it easier to read and spot errors. You can also get individual free copies of your credit reports from annualcreditreport.com.
Once you get all three credit reports, make sure every account that was included in your bankruptcy is listed. Look at the public records section and make sure it lists the bankruptcy as well. Also look for any accounts you don’t recognize or are not yours and dispute them.
It’s important to make sure the door is closed and clock stopped on old debts that were discharged in your bankruptcy.
4. Living with fear or shame – So you filed bankruptcy. So what?
The more you try to hide your bankruptcy, the more it will eat at you. Live with it. You did what you did because you had few other options. Your life hasn’t ended, you’re not on fire, and nobody poked you in the eye with a sharp stick.
It’s time to live for tomorrow, not yesterday. If you’re still feeling blue, read Is Bankruptcy Sinful and Bad or Right and Moral? An Examination.
5. Losing your bankruptcy paperwork – Put your bankruptcy paperwork with all your other important papers. You will need to hang onto that for life. The most likely reason you’ll need it is if a creditor comes back later and says their account wasn’t included in your bankruptcy.
6. Fearing filing bankruptcy will make it harder to get a job – The facts and research just don’t support this urban myth. If you want to know more, see Getting a Job After Bankruptcy. Don’t let the fact you filed bankruptcy hold you back from seeking a better job.
What you need to do to quickly rebuild a better financial life after bankruptcy
1. Start rebuilding your credit immediately – Don’t avoid credit: Get back in the game as quickly as possible after your discharge.
If you want to rebuild your credit score and improve your credit report, apply for a secured credit card that reports to all three credit bureaus. It’s the reporting of your new good and on-time payments that will rebuild your credit score.
Don’t be surprised if you start receiving credit offers in the mail right after your bankruptcy. Avoid the ones with high fees and low credit limits. For more, see How to Easily Rebuild Your Credit and Have Good Credit Again.
2. Start saving money – It’s important to start saving for two reasons. The first is to build an emergency fund so you don’t have to fall back on credit if a financial surprise happens. Make sure you have at least a few thousand dollars. Second, you’ll probably need or want a home or car in the future. The larger your down payment, the easier the approval and the lower the interest rate will be.
3. Start investing – If your employer provides matching funds in the company 401(k), invest at least enough to get their free money. Otherwise you’re turning away a guaranteed 100 percent return on your investment.
And never borrow from your 401(k), IRA, or 401(b). Keep that money off-limits and protected for your retirement. I’ve yet to meet anyone who said they retired with too much money.
4. Learn from your mistake – I always say there’s no sense wasting a perfectly good mistake. The real tragedy isn’t bankruptcy, it’s not learning anything from the experience. Take a good look at what led up to your mess, then make every effort to avoid those problems in the future.
And that’s it. As you can see, the mistakes are easy to spot and the steps to begin rebuilding a better life are simple.
There’s no reason why, if you follow this advice, you can’t have better credit than before or buy a new car next year or a new home in a couple of years.
Don’t let people tell you otherwise. Bankruptcy is survivable.