By Jennifer Cole
The first thought we remember on hearing the word “bankruptcy” is watching on TV the news of big corporate houses going insolvent. But, the truth is that roughly 97% of bankruptcies are filed by individuals and not businesses. While some people are broke due to unexpected events, in most of the cases the reason behind bankruptcy is the reckless handling of personal finances. A luxurious lifestyle may sound attractive, but it may not be sustainable in the long run. A minimalist approach with a concern for our society is what amounts to a good life. Insolvency is something an individual brings upon himself; however, there is some good news as well. It is equally easy to rebuild your wealth and credit score after going broke.
The First Step towards Doing the Unthinkable
People shy away from filing for bankruptcy due to reasons like the associated social stigma and the impact on one’s credit ratings, which in turn affects future prospects when applying for a loan. However, the best thing to do when you find your financial position out of control is to consider approaching a bankruptcy counselor. Decide if you can repay your debt over an extended period or if that is impossible. File for either Chapter 7 or Chapter 13 bankruptcy under the guidance of a credible attorney. Accumulating debts and mounting worries only stop you from any progress in life. Insolvency proceedings not only free you of your debt, but also offer you the opportunity to rebuild your finances, and your life from scratch.
Brick by Brick
Once you have filed for bankruptcy, it stays in your credit report for 10 years. But, if you steadily improve your credit record during this period, within 3-4 years creditors will start accepting your applications. And the reward for your good behavior is the interest on your loans are just 19 basis points over that of people with no history of bankruptcy.
To boost your credit score, start by getting a secured credit card. After establishing a habit of paying off your purchases on time, move to a regular credit card. Try not to use the maximum credit limit and keep your expenses to the minimum. Setting up an emergency fund that covers your expenses for 3-6 months should be an essential part of your rebuilding strategy. Equally important is protecting yourself from credit repair scams that falsely promise to remove certain components from your credit report for a fee. Such consciously made rebuilding efforts will pave the way for a positive credit score over the years.
Responsibility is the Key
The bankruptcy legislation is in place to protect people from sudden financial meltdowns; and in cases of personal mishandling of finances to give them a chance to reform. Start with planning your income and expenditure. This involves basic mathematical skills, but it is crucial to regularly keep track of your expenses. Put a full stop to the impulse buying spree, and cultivate the habit of accumulating enough money before purchasing something. Set up automated payments for all your liabilities. Keep track of the interest outgo of your loans. If you feel self-control is not your cup of tea, avail the services of a credit monitoring agency. They warn you of the adverse changes in your credit score. Apart from that, they also notify you about any suspicious activities like increased credit card purchases, opening of new accounts in your name, etc.
Remember that becoming bankrupt is not the end of the world. In a way, you can be grateful it happened. It opened the doors for possibilities that did not exist before. Through patience, willpower, accountability and discipline, you can transform a financial setback into your financial freedom.