Amid the hustle and bustle of holiday shopping, it is easy to get overwhelmed with the financial implications of going all out this season, lush with the giving spirit. From the decorations to the elaborate meals to reciprocal gift giving, charitable donations to travel expenses, the end of the calendar year can leave many looking at the state of post-holiday finances with a grimace to rival the Grinch himself.
Although many may feel the financial belt tightening, a few will look at the damage done and consider the pros and cons of bankruptcy as their personal best-fitting solution.
According to U.S. court data going back a decade, an average of 1 million people file for non-business bankruptcy annually. And, while bankruptcy does not always garner the best reputation, it is in place for those who are in need of a financial start over. Bankruptcy should be understood not as a copout, but as a prudent decision made after much time, thought and guidance as a way to rebuild financial well-being.
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Bankruptcy And Credit
One highly touted benefit of filing bankruptcy is the ability to “start fresh,” to essentially erase the slate and begin anew. While this is true, it is not the complete picture. Building credit from a blank canvas does not happen overnight. Just as maintaining a healthy credit report takes nurturing and vigilant attention, rebuilding credit post-bankruptcy requires constant supervision.
Marco Pantoja, interim-director of the office for financial success at the University of Missouri, explained, “Yes, it certainly is possible to build credit after bankruptcy. Bankruptcy can be seen as an opportunity to start over after making some poor financial decisions.”
“If new, healthy financial practices are put into place,” Pantoja emphasized, “a person who has experienced bankruptcy can move on and end up better than where they were pre-bankruptcy.”
Getting Credit Post-Bankruptcy Is Only Half The Battle…
Assistant Professor of Law at Howard University School of Law, Matthew Bruckner, J.D. elaborated, “The general consensus is that credit is relatively easy to get immediately after you get your Chapter 7 discharge. Think of it this way, before discharge, a person may have $10,000 in assets and $100,000 in liabilities. If you lend this person money on an unsecured basis (e.g., credit card debt), you can expect to recover – at most – 10% if this person files for bankruptcy (there are lots of assumptions even to reach 10%).”
“However,” Bruckner continued, “as soon as they’ve had their debts discharged, they may still have $10,000 in assets but may now have $0 in liabilities. As a result, they are a much better credit risk. Moreover, a person cannot get another discharge for many years. In short, at post-discharge a potential borrower likely has a better debt-to-income ratio and lacks the escape hatch of a bankruptcy discharge. Chapter 13 bankruptcies are different.”
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Cultivation Your Credit Report Is The Other Half
Todd J. Zywicki, J.D., executive director of George Mason Law & Economics Center and GMU Foundation Professor of Law and editor of the Supreme Court Economic Review, shared his take on rebuilding credit.
“If you get your financial house in order and pay your bills regularly, you can improve your credit score substantially in a short time,” he explained. When asked about the length of time it takes to build credit post-bankruptcy, Zywicki went on, “It depends. But, six months of regular bill paying can make a marked improvement in one’s credit score. It is crucial to make all payments promptly and not backslide.”
Zywicki added, “Probably the easiest thing [to maintain good credit following recovery] is to avoid inadvertent late payments – for example, set up automatic bill payments so you don’t pay late. Otherwise, the point is obvious – don’t overborrow. But, also, don’t eschew debt completely – some people try to respond to a bankruptcy by swearing off all debt.”
As a final piece of advice, Zywicki concluded, “[I]f you do that [swear off all debt], then you can never rebuild your credit. So, manageable debt is actually a good thing for improving your credit score.”
Above All, Don’t Tackle Debt Alone
As with any financial situation, remember that you are not alone. There are professionals available to help guide you to financial health. Do not struggle through debt alone. Reach out to those around you, get help and get healthy.
Once you are on the path to financial recovery, do not ignore those same principals; there are programs, professional advisors and financial planners who can help you build the best financial you.