Congratulations, you have received your bankruptcy discharge at the end of your Chapter 7 or Chapter 13 case. You are anxious to get a fresh start. What should you do next? Here are a few steps you should take to rebuild your credit, ensure financial future, and make sure you get the most from your new debt-free status:
Keep Copies of Your Bankruptcy Paperwork. It is important to keep copies of your bankruptcy petition, schedules, and order of discharge for your records. You can retrieve these documents from the court later, if you lose them. However, it may cost you and can be a bit of a hassle.
Why keep your paperwork? Although it does not happen every day, creditors have been known to try to collect on a debt that has been discharged in bankruptcy. As I tell my Philadelphia area bankruptcy clients, if any creditors try to collect after your bankruptcy, you can beat them into submission with the discharge. (Creditors can get into serious trouble for harassing you after your bankruptcy.) Moreover, as we will discuss below, you may need your paperwork to correct any issues with your credit report.
Check Your Credit Report. I suggest checking your credit report a few months after you receive your bankruptcy discharge. (It takes a while for the credit-reporting agencies to update your report.) You can get a free copy of your report once a year from each of the major agencies at www.annualcreditreport.com. Every debt discharged in your bankruptcy should be noted as “discharged in bankruptcy” or something similar. If a debt is still listed as owed, you can send a copy of your discharge to the credit-reporting agency along with the schedule (D, E, or F) that lists the debt.
Make Arrangements To Pay Any Non-dischargeable Debts. If you have non-dischargeable debts, such as student loans or certain taxes, you will need to contact the creditor to make arrangements to pay them. As to student loans, you should receive a forbearance for the time that you were in bankruptcy. There are various programs to lesson the burden of student loan payments, including income-based repayment, which you may wish to explore.
Regarding non-discharegeable income taxes, contact the IRS, state revenue department (e.g., the Pennsylvania Department of Revenue), or the local taxing authority to make payment arrangements. (The IRS will typically accept a monthly payment of around 2% of the total.) However, if you have a substantial tax debt, you may need the assistance of an attorney to work out a settlement.
Start Rebuilding Your Credit. To rebuild your credit, you may wish to obtain a secured credit card. A secured credit card uses money deposited in a bank account as collateral for the credit card. (Note that a secured credit card is not the same thing as a prepaid credit card. Pre-paid credit cards do nothing to improve your credit.) Some creditors offering secured cards do not require a credit check and may be easier to obtain. However, do shop around. A number of secured card providers charge excessive fees and interest. Also, you should make sure the provider reports to all three credit reporting agencies.
However, it is important to use no more than 10% to 20% of your available credit. So, if you have a limit of $500, avoid running a balance of more than $100 on the card at any one time. The purpose of this card is to rebuild your credit, so responsible use is key. I do not recommend getting multiple cards. If you are a couple, it is fine to have a separate card for each of you. However, one credit card should be enough for anyone.The creditor can take the money in the account only if you default.
If you need a car, financing an vehicle can also help you rebuild your credit. Vehicle financing is generally more available after bankruptcy than other types of credit, although you may need to shop around for an reasonable interest rate. However, it is important to keep your payment reasonable. Moreover, new cars are a horrible investment. So, it is best to limit your purchase to an inexpensive used car.
Quick Note: You may receive solicitations from “credit repair” companies. They are scammers. Concentrate on rebuilding your credit systematically over time.
Make Timely Payments, If Keeping A House. If you did not reaffirm your home mortgage loans but plan to keep your property, simply continue to make your house payments on time (on all mortgages). The bank still has a lien on your home. Therefore, it can foreclose, if you fall behind on the payments. However, because you did not reaffirm the debt, the bank cannot obtain a deficiency judgment against you. Note that if you did not reaffirm the debt, your payments (or non-payments) it will not be reported to the credit bureau.
Quick Note: Can you walk away from your home after bankruptcy? As we discussed early in the bankruptcy process, not reaffirming a mortgage loan gives you options you would not have if you reaffirmed the loan. If you did not reaffirm your mortgage loan and decide at a later date that you no longer wish to keep your home, you can simply stop making the payments. Eventually, the home will go into foreclosure. Just know that if you decide to walk away from your home, you are responsible for any homeowner’s association fees and for keeping the property up to code until the property transfers to a new owner. In addition, you have potential liability for injuries to persons and other properties. Homeowners insurance placed on the property by the bank when you stop making payments may cover only the bank’s interest. Therefore, you may consider keeping your current policy in place until the deed is transferred. Also, note that the foreclosure may or may not be reported on your credit report. However, the debt is discharged.
Can you refinance your home after discharge? It depends on several factors, including the bank’s policies. Generally, it will take some time after bankruptcy to rebuild your credit to the point where refinancing is possible. In addition, some banks will not refinance a current loan, if the homeowner did not sign a reaffirmation agreement. Therefore, if you did not sign a reaffirmation agreement, you may need to seek refinancing from another bank or look at a modification instead.
Can you obtain a mortgage modification after your discharge? Some banks will offer a modification to your mortgage after your bankruptcy discharge. I have had a number of clients over the years who have obtained mortgage modifications after bankruptcy, even on loans they did not reaffirm. However, there are no guarantees, and you will have to go through the bank’s process.
Make Timely Payments, If Keeping A Car. If you have a car loan that you did not reaffirm, simply continue to make timely payments, if you wish to keep the car. The lender retains a lien on your car and can repossess, if you get behind.
Quick Note: Can you return your vehicle after bankruptcy? If you did not reaffirm your vehicle loan and no longer wish to keep your vehicle, you can arrange to turn it over to the lender (a voluntary repossession). As long as you did not reaffirm the debt in your bankruptcy, the creditor cannot obtain a deficiency judgment.
Update Your Will. Because your financial situation has changed, I recommend that you review your will to see if it needs to be revised. If you do not have a will, you may wish to have an attorney draft one. In my Philadelphia area bankruptcy practice, I am always happy to refer my clients to an estates attorney who can revise or draft one at a very reasonable cost.
Set Up A Savings Plan. On other words, pay yourself first. Even if it is only a few dollars per pay period, try to put back a little for emergencies as soon as you are able. For many people who have been out of work or otherwise financially devastated, it can be hard to imagine being able to save again. However, even a small amount can add up over the long run.
Contribute To A Retirement Plan. If you already have a 401k or other retirement plan, try to contribute as much as possible (at least as much as your employer matches.) Of course, if you can max out your contributions, so much the better. However, as with general savings, even small contributions add up over time. If you do not have an employer-based plan, consider opening a no-fee or low-fee IRA and making regular months contributions that come out of your account automatically on the day you are paid. The key to retirement savings is to set up the account so you never see the money.
If you take care of these few items after your bankruptcy, you will be well on your way to a better financial future.