Bankruptcy a bad dream that needn't reappear

PERSONAL FINANCE

Dollar & Sense

February 24, 2002|By Eileen Ambrose

LAST year, a record number of people sought a financial fresh start. Personal bankruptcies, which had been declining for two years, soared to 1.45 million cases.

While bankruptcy helps those overwhelmed by debt to start over, it's not an immediate clean slate.

Once you file for bankruptcy, it may take about five years of paying bills on time to rebuild a credit history that makes you eligible for the most favorable lending rates.

Until then, you still will be offered credit, but at high rates or exorbitant fees on cards, experts said. The bankruptcy will remain for years on your credit report, which may be viewed by prospective employers and landlords.

"You have difficulty changing jobs," said Thomas Garman, a retired personal finance professor and now a researcher with InCharge Institute of America, a Florida-based debt counselor. "You may not get an apartment lease."

Bankruptcy, too, doesn't erase all debts, including student loans, alimony, child support and most taxes. If you file under Chapter 7, which can be done once every six years, all nonexcluded debts are wiped out. Under Chapter 13, you repay all or a portion of debts over three to five years. A Chapter 7 remains on your credit report for 10 years; a Chapter 13, seven years.

Annie Harris, 58, said she was financially struggling as a single parent with three children and two grandchildren at home when she filed for bankruptcy under Chapter 13 in 1990.

Once she filed, she said, offers for car loans and credit cards poured in. "I tore them up," said Harris, a youth supervisor in Baltimore for the state of Maryland. "They see that you filed for bankruptcy, and say `We can help put you in a car today.'" Two years after repaying her debts, Harris said, she was still charged a high interest rate on a car loan.

The good news is that financial wounds can heal. "With time and good behavior, everyone is willing to give you credit again and at favorable terms," Garman said.

So how do you start rebuilding finances and credit history after a bankruptcy?

First, understand what got you into financial trouble in the first place, experts said. Was it a one-time crisis that threw you for a financial loop or does the way you handle money need to be changed?

"The majority of people have not filed bankruptcy because they just ran rampant with credit and are living beyond their means. For most people, bankruptcy was caused by some unexpected event, a divorce, job layoff or illness. The circumstance that put them there is not likely to occur again," said Constance Hare, a Pikesville bankruptcy lawyer.

"For the compulsive spenders, unless they take action to get to the root of their problem ... they will be in the same situation two years down the road," Hare said.

Here are some tips for rebuilding after bankruptcy:

Review income and expenses. Knowing how much is coming in and where it goes can help you figure out where you can make cuts to build up savings so you won't fall back into financial hot water if an emergency crops up.

Building savings takes time, but it doesn't take much money. Forgoing, say, the daily $3 latte saves more than $1,000 a year.

Rebuild a relationship and creditability with a financial institution, said Brooke Stephens, author of Wealth Happens One Day at a Time. You can do that, for instance, by having $25 or $50 deducted from your paycheck and put into a credit union or bank savings account, she said.

Pay bills on time. This is crucial to establishing a good credit record. Whether it's a car loan, mortgage, credit card or student loan, you need to make prompt payments and show creditors you're responsible, experts said.

Avoid opening many credit-card accounts. Once your debts are discharged in bankruptcy, your mailbox will be stuffed with card offers because issuers know it will be years before you can file again, experts said. Opening, say, a half-dozen accounts, though, will raise a red flag among creditors even if you don't use all the cards, because your potential to rack up debt could be high, experts said.

While some emerging from bankruptcy swear off plastic, for others it's not only a convenience but it may be a necessity if they travel for their job. You have several card options.

Some experts suggest limiting yourself to one credit card with a low limit of $500 to $1,000. As you develop a track record of prompt payments, card companies will increase your limit. If that new limit is more than you can handle, call the card company and ask that it be reduced, said Joanne Hamilton, extension educator for Maryland Cooperative Extension in Anne Arundel County. "It's like having too much cash in your wallet," she said.

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