Getting A Fresh Start Without Debt - Total Bankruptcy
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Steps to Improve Credit After Bankruptcy

Step 4 - Rebuild Your Credit

If you have filed bankruptcy and had your debts discharged - Congratulations!

However, don't allow yourself to be lulled into a false sense of security because you're out of debt now and can keep up with your current obligations. Just because you can pay your minimum payments each month right now does not necessarily mean you are financially fit yet.

Recognize your need to take this opportunity to examine what caused you to file bankruptcy in the first place and curb your behavior so that you do not fall into that same position again. Determine how much you can save, how much you owe, how much you net each month, and how much you pay toward monthly bills.

If you spend less than you make and save the rest, you should be well on your way to reducing your need to go into debt as you move forward after bankruptcy.

Understand Your Debt

Of course, a totally debt free existence is not possible for most people. You probably cannot afford a home without taking on debt. Certain types of debts, however, are generally better than others.

Borrowing to finance a home is generally one of the best reasons to take on debt, as the interest you pay on your home is tax deductible, most homes appreciate in value over time (allowing you to pay off your debt), and you would have to pay rent to live somewhere anyway if you didn't own a home.

Other types of debt are not so favorable. For example, when you take on debt to buy a new car, unlike your home, your car will not increase in value. In fact, once you drive it off the lot, it will lose approximately 25 percent of its value due to depreciation.

So, you are suddenly in the situation where you have borrowed money, the interest is not tax deductible, and the item quickly loses a significant portion of its value.

Credit card debt is the most unfavorable debt of all. Some credit card companies lure you in with low introductory rates and low monthly minimum payments. Later you find out that the interest rates go up and that the low monthly minimum payments benefit the credit card company, not you.

The "minimum amount due" is cleverly calculated to keep you shackled to your credit cards for your entire adult life. The credit industry does not make it easy for you to take advantage of the fresh start because its entire existence is based on extending you ever larger amounts of credit. It encourages an ATM mentality, where money is always available at the push of a button.

Credit is not really money - it's money with strings attached. The moment you receive new credit - whether it's a second mortgage on your home, or one of those 'convenience checks' offered by a credit card company - you've suddenly incurred a debt-an obligation to pay someone back.

From the moment you take on this new debt, you will be required to pay interest on it, and the debt will continue to increase every moment until you are able to pay it off in full. Accordingly, you're really going to have to get to work on staying out of debt by carefully investigating how 'smart' a debt is before you incur it.

You need to understand that once you agree to take on debt, the debt belongs to you, and ultimately, you are responsible for it.

Control Your Debt—Don't Let Debt Control You

Now that you've got an understanding of what your debt is and how it's affecting your life, it's time to start doing something about it. Make a commitment to yourself to try to stop resolving your financial problems without going deeper into debt.

Think like an emergency room doctor treating a gunshot victim: your first goal is to stop the patient from bleeding to death. Once that is done, then you can spend the time trying to work on a more permanent cure.

Ben Franklin once said, "Pay what you owe and you'll know what's your own." In other words, the ever-cautious Franklin believed that if you pay for everything with the money you have, you will then have the clarity of knowing that everything you see around you belongs to you, not the credit card company, the bank, or the finance company.

In all likelihood, you have little or no credit card debt right now. So use this as an opportunity to stop using credit cards or at least start controlling the way you use them. If you can possibly avoid using credit cards, avoid them. These little innocent pieces of plastic can cause you big headaches when you're trying to get a fresh start.

If you have to use a credit card out of convenience, only charge as much as you can afford to pay, and pay it off at the end of each month. Using a credit card to stay afloat is a recipe for repeating the same mistakes that may have gotten you into bankruptcy.

If you cannot pay off your balances in full each month, you may be paying thousands of dollars in interest, finance charges, late fees, over-the-limit fees, and all of the other sneaky charges that credit card companies tack on to your bill.

Buying a Home after a Bankruptcy Filing

Despite the fact that most lenders will perceive you as a credit risk after your bankruptcy, it is indeed possible for you to buy a home after bankruptcy. First of all, since your lender will have your home as security for your mortgage loan, your lender will likely be less concerned about your ability to repay your loan than it would be for an unsecured loan (like most credit card debt).

Furthermore, since your credit score is based more heavily on your recent behavior than your past behavior, if you can start rebuilding your credit quickly after bankruptcy, control your expenses, and start showing a strong payment history, you should be in good shape to purchase a home after your bankruptcy. In other words, most lenders will be much more interested in your down payment, the stability of your income and the relationship between the loan payments and your monthly income than your past financial troubles.

In shopping for a home, here are some general things to know:

  • Shop around for everything. Remember, your home is likely to be the largest investment you'll ever make. Accordingly, it pays to be a smart shopper. Comparison shop for your mortgage, your real estate broker, and your home.
  • Use a mortgage broker. A mortgage broker is an independent contractor who works with multiple lenders in order to find the best loan for you. By combining professional expertise with direct access to hundreds of loan products, a mortgage broker provides you with the most efficient and cost-effective method of financing tailored to your specific financial goals. Mortgage brokers have also pioneered the "subprime" credit market, using innovative loan programs to allow borrowers who have previously filed for bankruptcy to start enjoying the benefits of home ownership.
  • Look for cash-back deals. Despite what you may have heard, real estate brokers' commissions are not set in stone. Due to heavy competition in the real estate brokerage industry, many brokers and real estate web sites offer cash-back or rebate programs when you use their preferred real estate agents. You can save thousands of dollars on commissions with these programs.
  • Don't base your mortgage decision solely on the interest rate offered. There are many other important factors, such as the amount of your down payment, costs and fees, the length of the loan, whether you have to purchase private mortgage insurance, and numerous other factors. A mortgage broker can help you with all of these important details.

Buying a Car after Bankruptcy

If you need to buy a car, it can be done. If you're still making payments under your Chapter 13 bankruptcy, you will need to get the trustee's permission before you buy a car in bankruptcy. Chances are good, however, that the trustee can work with you to fit the car into your budget.

Since credit may be difficult if not impossible to obtain right away, and cash will be tight, consider a used car. If you can afford it, consider a used car still under warranty. Most car makers offer certified used cars which may still have lengthy warranties available on them.

Again, use the Internet. You can use the Internet not only to find available cars, but also to research cars' reliability and repair history. You don't want to get stuck with a lemon.

If you do buy your car from a dealer, keep the focus on how much you want to pay for the car, not on how much you can afford to pay each month. For example, tell a dealer that you're looking to buy a car that's two to three years old and tell the dealer the absolute limit of how much you're willing to pay. A good dealer should work with you to keep you within your budget and will stop trying to sell you on the 'low monthly payment' as soon as they see that you are serious about wanting to spend no more than the price you've determined.

If you have a friend or family member who is willing to co-sign the loan, that could get you past the credit issues arising from the bankruptcy. However, it's a big obligation on the part of the co-signer because they're agreeing to make the payments if you don't.

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Renting an Apartment after Filing Bankruptcy

Although it may be difficult to rent an apartment after filing bankruptcy, it's not impossible. Some landlords will require a large security deposit or charge you higher rent in order to agree to lease you an apartment. You may be able to avoid this if you can show the landlord that you were a responsible tenant in your prior apartments by providing references from prior landlords. Also, as a practical matter, most small landlords will probably never check your credit report or bankruptcy history, so this may never even be an issue.

Protect against the unknown

Many of you may have found yourself in bankruptcy through no fault of your own, perhaps as a result of unfortunate circumstances. This is not surprising. Job loss, divorce, and illness together account for approximately 80 percent of all bankruptcies.

If this is the reason why you were forced into bankruptcy, you unfortunately understand all too well the power of unforeseen circumstances. But even if there were other causes for your bankruptcy, the critical point to take away with you is that it is wise to prepare as much as possible for these unforeseen circumstances. For example, to protect against income loss that follows from an illness, make sure you have both health insurance as well as supplemental disability insurance-this is the insurance that replaces your income when you are disabled from working. You can also take out disability insurance on your mortgage, your car, and other big ticket items to protect you in the event of an unforeseen illness.

Obviously, it is more difficult to protect against a job loss or a divorce, but these possibilities are all the more reason to develop solid money management strategies. If you can control your spending, live within a budget, and start saving money, the effect of these unforeseen circumstances will not be as devastating as they would be without this type of planning.

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