Looking Ahead: Financial Planning After Filing Bankruptcy

Over my decade of experience as a public interest bankruptcy attorney, I have helped hundreds of debtors file for bankruptcy and obtain a new economic beginning. While I am not a financial planner, many of my clients ask what steps to take after obtaining a bankruptcy discharge. The purpose of filing bankruptcy is to provide individuals burdened with consumer debt a fresh start. Receiving a discharge, either through a Chapter 7 or a Chapter 13 bankruptcy, feels like a huge weight has been lifted because creditors will not be able to pursue claims on discharged debts. The bankruptcy relief gives people the opportunity to start over but they should do some financial planning so that they stay financially stable in the future. Three major aspects to building a healthy financial plan after bankruptcy are (1) initial steps to update your credit file right after filing bankruptcy (2) developing a savings plan, and (3) rebuilding credit.

Initial steps right after filing bankruptcy.

A bankruptcy discharge eliminates an individual’s obligation to pay back certain consumer debts. Creditors will not be able to take action against the debtor such as contacting or suing the debtor, garnishing the debtor’s wages, or freezing the debtor’s bank account in order to collect on the discharged debts. However, it is not uncommon for creditors to collect on discharged debts because the creditors did not update the debtor’s account on in the creditor’s system or the debtor’s consumer credit file. A consumer credit file has data on an individual’s debt and repayment history.

After filing bankruptcy, individuals should obtain copies of their credit reports. Under the Fair Credit Reporting Act, credit information gathered and reported in an individual’s credit file with a credit reporting agency must be fair and accurate. After a bankruptcy discharge, creditors must update an individual’s credit file to indicate that the debts owed to them were discharged in a bankruptcy.

Individuals have a right to obtain and review a copy of their credit reports and can request a free credit report every twelve (12) months from all of the three nationwide consumer credit reporting agencies: Experian, Equifax and Transunion. Free credit reports from all three credit reporting agencies can be obtained by going to www.annualcreditreport.com. Any information on the credit file that is incorrect should be disputed and individuals can request that the inaccurate information be corrected.

Developing a savings plan.

After obtaining a fresh start through the filing of a bankruptcy, it is important to establish a savings plan. A savings plan is one where individuals utilize cash saved up to deal with unforeseen emergencies, to achieve a short-term and/or long-term financial goal, and build a stable financial future. A short-term financial goal is one that individuals plan on accomplishing within a year or two. An example of a short-term goal is to put together a $500 emergency fund. This can be done by saving a certain amount of money each month. A long-term financial goal, such as building a retirement fund or saving for a down payment to purchase a home, takes longer to accomplish, involves saving more money and requires discipline to continuously save. Building a stable financial future by having a savings plan will help individuals continue on to their fresh start journey after filing bankruptcy and can be done in the following ways:

1. Set up a savings account that is separate and apart from other accounts which are used to pay household expenses and make regular purchases.
2. See our post on the 5 ways a person can maximize his/her savings account.

Rebuilding credit.

The filing of a bankruptcy can affect an individual’s credit rating. For most people, the filing of a bankruptcy will reduce a person’s credit score by 100 points. Also, a bankruptcy filing will appear on a person’s credit report for up to 10 years. However, it does not mean these individuals will not be able to obtain credit again. As a matter of fact, creditors will send individuals, who have recently filed for bankruptcy, letters of solicitations to apply for credit. Individuals should beware of these offers because they will often include higher interest rates and fees. Before embarking on a mission to rebuild credit by applying for new credit cards, individuals should consider doing the following:

1. Revisit the household budget, or create one, and include credit card repayments as an expense. Remember there is a cost to using credit, which comes in the form of interest payments or fees.
2. Understand how credit works and the different types of lines of credit available. The most common types of lines of credit are secured credit cards or loans, and unsecured credit cards or loans. Secured credit cards or loans, such a car loan, are tied to property (collateral) and if a consumer defaults on the loan, the creditor can repossess the property as well as go after the consumer for the remainder of the debt. Unsecured credit cards or personal loans are lines of credit that are not tied to any property and come in the form of credit cards, store cards, or pay day loans. Payday loans are unsecured loans made against a person’s paycheck with very high interest rates. Payday loans are illegal in New York.
3. Shop around. When buying furniture, clothes, or services such as a cellphone or cable plan, individuals tend to comparison shop for the best prices and benefits. The same concept should apply to credit, and individuals should shop around for the best interest rate and rewards, if any, are offered by creditors.
4. Stick to a lower more manageable line of credit in case financial circumstances take a turn for the worse.

I hope this information helps you understand how to move forward after bankruptcy. We recommend that everyone consult with a bankruptcy lawyer prior to filing for bankruptcy.

Ramona Morel is Director of the City Bar Justice Center’s Consumer Bankruptcy Project.