The first order of business...eliminate the problem that led you to file in the first place. Unlike the government—who can print more money when they get in a bind—we don't have that luxury to get out of our dilemma.
This first step to bankruptcy recovery can be tough for most people. It was tough for me and my wife, Michelle. We had to come to the realization that the way we managed money didn't work.
I wanted all the toys and luxuries everyone else had, even though we couldn't afford them. But of course, this didn't prevent me from buying expensive items we really didn't need.
This got us into financial problems. Michele and I eventually agreed I was the problem. When our Jeep Grand Cherokee and furniture were repossessed, it was my wake-up call. I still remember helping the repossessors load our new furniture in their truck—and Michele crying on the front porch.
Obviously, we were doing something wrong with our money.
Instead of asking someone else to fix our finances for us, Michele and I were determined to manage our money wisely—in order to create a foundation to build on.
So we started with common sense. We asked friends and family who were good with money how they managed their finances.
We quickly learned that we couldn't have luxuries and money while we were rebuilding our credit. We needed to choose one.
Here are some of the steps Michele and I took to recover from bankruptcy:
Began paying our bills early...worst-case, on time
We stopped paying our bills late. We drew a line in the sand and said..."No more! All bills from this point on will be paid early...worst-case, on time." It was amazing how much we saved in late fees and overdrafts...not to mention the satisfaction of being responsible. Initially it wasn't easy. But the short-term sacrifices were worth long-term financial stability.
This is easier today than it was for us many years ago. Today you can take advantage of online bill-pay or automatic bill-pay.
Avoided finance companies
It's easy to get loans or credit after bankruptcy from a finance company. And some (misinformed) people will actually tell you this is good. Credit from a finance company is not good. Not only is it very expensive, having finance companies appear on your credit reports lowers your FICO credit scores (which makes everything else more expensive).
Finance companies are the lenders of last resort. You have to stay away from them at all costs...unless you don't mind paying 25% interest and working with lenders who are friends with the Mafia.
Just said, "No," to co-signers
Bankrupt people often think, "The only way I can get new credit is to have a co-signer." Whether that's from a parent, brother, sister, relative, friend...whatever...you don't need that kind of help reestablishing credit.
Bottom line: you don't want to have co-signers for several reasons.
First, it's not a wise thing to do. It even says not to co-sign in the Bible. You put the co-signer's credit on the line if something goes wrong. If you don't make the payment, guess who they come after? Yup—the co-signer. Can you say, "Friendship over," or, "Relationship strained?"
In addition, having co-signers appear on your credit reports weakens your position with future lenders. When a new lender sees you've had a co-signer, they'll consider you a greater risk and they may ask for a co-signer for their loan as well. In other words, once you get a co-signer for one loan, you start a vicious cycle that is hard to break.
The word "no" meant nothing
You must understand...most of the lenders you come into contact with after bankruptcy have no interest in helping you recover. You're going to hear the word "no" a lot.
You've got to get in your head that the word "no" means absolutely nothing. So if a car dealer tells you, "There's no way you'll be able to get financed, you shouldn't believe him. If a mortgage broker laughs at your goal of owning your first home instead of renting...laugh right back at her.
Discovered the power of asking open-ended questions
When a lender tells you, "No,"...don't stop there! You'd be missing out on the best part of the experience. You need to ask some very important questions, like...
"What would you do if you were me?"
"Since you can't help me, where would you go if you needed to get financed?"
Asking open-ended questions like these helps you find the people you should've been talking to in the first place. That's how we found the car dealer that financed our first car after bankruptcy with very little money down (and that was a post-dated check) at 2.9% interest.
Of course, now I think that's a so-so deal.
All you need to do is know where to go...be prepared...know which cars have the best incentives...and know what questions to ask. Most importantly, always be ready to walk away from the deal, no matter how much you want that new car.
Establish the right kind of accounts.
Overall I encourage people to rebuild their credit after bankruptcy by establishing these types of accounts:
1. Checking and savings accounts at a bank or credit union
2. A few secured bank cards
3. One or two retail credit cards (just don't go crazy)
4. A few secured bank loans.
5. A car financed through a bank, credit union, or captive lender (that reports to all three national credit reporting agencies).
6. A home mortgage.
7. A refinanced mortgage.
8. A home equity loan (not a home equity line of credit).
9. Real estate investment: Your current home becomes your first investment property and you shop for a new home.
Obviously this doesn't happen all at once. And the order changes depending on what you need. This is pretty much the order in which we did things after our bankruptcy.
Notice I don't have any finance company or Crapital One accounts listed above. Sometimes knowing what accounts to avoid is as important as knowing which accounts to establish.
You'll also notice I don't have a personal loan listed above. I spent too much time looking for loans after I went bankrupt. I figured if I could just get a big enough loan, I'd pay off all my debts. Of course, it didn't occur to me that I'd still need to pay off the loan. Duh!
It's like a disease. (Hi, I'm Stephen, and I'm a loanaholic.)
Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy information and recovery steps. Stephen also writes a free weekly newsletter on bankruptcy recovery.
http://www.buzzle.com/articles/first-steps-to-take-after-youve-filed-bankruptcy.html
