Since bankruptcy is a legal declaration that you can no longer meet your financial obligations, it is easy to see it as a sign of defeat. However, if you view bankruptcy this way, you could miss the true purpose of this legal procedure. Bankruptcy provides a framework for you to make a fresh financial start.
Although it can be challenging to rebuild your finances with a bankruptcy on your credit report, you can find redemption in the finance world by using bankruptcy to establish a system of paying your bills and handling other financial matters.
To help you make the best of bankruptcy, this guide demystifies the process and its impact on your finances. Also, this guide provides tips on getting the full benefits of bankruptcy protection and rebuilding your credit.
How Long Does Bankruptcy Affect You?
The length of time a bankruptcy affects you depends on the type of bankruptcy you choose: Chapter 7 or Chapter 13.
In 2022, 58 percent of bankruptcy cases were Chapter 7 filings. Chapter 7 bankruptcy is popular because you can keep exempted assets like your car, furniture, and personal possessions. The downside is that you must surrender your cash reserves, investments, and real estate to settle as much of your debt as possible before the court dismisses the remaining debt. Also, a Chapter 7 bankruptcy stays on your credit report for ten years - significantly longer than a Chapter 13.
Chapter 13 allows you to protect your real estate, savings, and other non-exempt assets, provided you fully repay your creditors through a court-approved plan in three to five years. So, people who have a vast amount of assets would likely file Chapter 13. In addition, some people may choose Chapter 13 because it only stays on their credit report for seven years.
The Effect of Bankruptcy on Credit Score
Regardless of your choice, your credit score after bankruptcy will drop significantly. As a result, you will most likely have difficulty securing new credit and loans, especially in the first few years. There will be loan opportunities available after the court discharges your debt. But the lenders will most likely charge you exceptionally high-interest rates with strict terms.
However, with patience and dedication, you can increase your credit score to about 700 within two years, even with the bankruptcy on your credit report.
This is why you can look at a bankruptcy as a new beginning. Even if you had bad credit before the bankruptcy, your settlement could pave the way to a better credit score by deleting delinquent accounts reports, improving your debt-to-credit ratio, and eliminating your debt history.
The Effect of Bankruptcy on Spending
Another positive outcome of bankruptcy is that it can make you take a more critical look at how you spend money and how your spending affects your budget. Unfortunately, medical bills, divorce, family crises, and overspending are among the leading causes of bankruptcy in the United States.
So, you can be the hardest-working person around with a sizable income. But one unforeseen financial or personal crisis can expose the effect of careless spending and inadequate financial planning.
How Should You Approach Spending After Bankruptcy
The best way to approach spending after bankruptcy is to create a strategy with several action plans, including the following.
- Plan your purchases: Avoid buying products just because they are on sale. Also, carry a budgeted amount of cash for purchases on shopping expeditions. When you exhaust your cash budget, end your shopping activities. Also, you should save money for larger purchases like refrigerators or vacations.
- Create a budget and stay loyal to it: Consider using the 70-20-10 spending rule to simplify the process, meaning 70% of your after-tax income pays for your essential monthly expenses, 20% for your savings and investments, and 10% for debt repayment.
- Establish an emergency savings fund: A cash reserve can cover unforeseen expenses and emergencies without you going into debt.
- Check your bank account balance daily: This practice allows you to keep track of your available cash to prevent you from overdrafts and overspending.
The Effect of Bankruptcy on New Loan Applications
Although bankruptcy significantly impacts your credit score, it doesn't automatically take away your ability to get a loan. Some lenders offer bad credit loans to people with bad credit histories and even bankruptcy. However, you should expect higher interest rates, unattractive loan terms, and fewer lending choices than someone with better credit.
Each lending type has unique standards and requirements concerning a loan application and bankruptcy. Therefore, to increase your loan approval chances, you should consider the following specifications of each loan type and the things you can do to address them.
Credit Card Applications
Bankruptcy weighs heavily on your chances of getting approved for most credit cards. But you can get credit card approval from lenders who cater to consumers with bad credit or bankruptcies. Once your credit card applications get approved, you can raise your credit score by making on-time payments. Or you can avoid the higher interest rates that bad credit lenders charge by getting a secured credit card. This card type only allows you to borrow the amount that you have pre-deposited. Also, you can re-establish your credit by signing on as an authorized user of a friend or relative's credit card.
Mortgage Applications
The four primary types of home loans have unique requirements concerning mortgages and bankruptcy. Here are some of the most specific ones.
- FHA Loans: The government-managed Federal Housing Administration loans require Chapter 7 filers to wait two years before applying and Chapter 13 filers to wait one year. These loans require as little as a 3.5% downpayment. But you'll have to pay mortgage insurance.
- VA Loans: Veteran Affairs loans have the same waiting periods as FHA loans. However, they don't require a down payment or mortgage insurance, only a low funding fee.
- USDA Loans: The U.S. Department of Agriculture loan makes Chapter 7 filers wait three years while Chapter 13 filers wait one year. To qualify for this loan with little or no down payment, you must buy a house in a rural area, earn a low or moderate income, and fail to qualify for a conventional loan.
- Conventional Loans: These loans require a much longer wait for bankruptcy filers: four years of Chapter 7 and two years for Chapter 13. Also, you must pay for private mortgage insurance if you put less than 20% down.
Personal Loan Applications
It's possible to get a personal loan after bankruptcy. But be prepared to pay a higher interest rate with strict terms. Since Chapter 7 bankruptcy takes less time to discharge, you can apply for a personal loan much sooner than someone filing Chapter 13. But the Chapter 13 filers may find it easier to get approved sooner than you because the bankruptcy notation disappears from their credit report three years before a Chapter 7 bankruptcy.
The three personal loan approval factors that you have control over are your credit score, income, and type of loan. If your credit score and income are a significant setback, you may consider lenders who consider factors other than credit.
Your Credit Future After Bankruptcy
Bankruptcy helps consumers overcome debt problems and resume healthy spending. Now that you are aware of how bankruptcy affects your life, you are more prepared to make the best decision. And if you need money now, consider a lender that considers more than your credit score, like Jora Credit. Apply for a loan at Jora Credit today.