At 24, I was in a good place both financially and personally. I had a full time job, my dream apartment and enough disposable income to keep myself entertained. Sure, I had a little credit card debt –who didn’t?—and my car payment was a tad high, but I wasn’t worried. I made enough money to keep things running smoothly.
And then one morning, a stomachache I mistook for indigestion signaled the start of a mystery illness that would drastically change my life. Without going into too much detail, my illness kept me from working and thus, I was unable to pay my bills. My parents were able to scrape enough together for my car payment, but rent and other bills were just too much for them to shoulder.
I ended up broke, living with my parents and in constant, mind-numbing pain — all of which caused me to spiral into a depression. When faced with bankruptcy, I felt as if I’d been handed a death sentence.
I had worked hard to build my credit. I never missed payments, always paid well above the minimum amount due and had even bought and paid off a car without a cosigner. For a 24 year old, my credit was gorgeous.
And then it wasn’t.
I hit my lowest point at my lawyer’s office, as we sat on opposite sides of his desk going through the paperwork. As I looked at my financial history splayed out in front of me, it dawned on me that it was all for nothing. All my hard work had been worthless.
Unable to contain my emotions any longer, I burst into tears. For a moment, my lawyer looked a bit stunned. Then, he leaned across the desk, took my hand and said “Honey, I know you feel like it now, but this isn’t the end of the world. You’re gonna make it through this.”
He was right. It wasn’t the end of the world, and I did make it through the bankruptcy with my sanity intact. It wasn’t easy, and I still have a lot of work ahead of me, but I know I can rebuild my credit. I have the knowledge and the tools and I’d like to share a little of what I learned with you.
Filing Bankruptcy Isn’t Free
As if it weren’t bad enough being broke and being unable to pay my bills, it turned out I had to come up with money for a lawyer and filing fees for the courts. All in all, I paid around $800 to cover upfront costs.
I managed to time filing for bankruptcy right as I received my tax return –which was enough to pay for everything—but not everyone is that lucky. If you can’t pay for a traditional lawyer, consider using an affordable legal service to get legal advice while you manage your bankruptcy case yourself. I don’t recommend going the process completely alone, though. Every case is different and you could end up losing property or rights if you don’t know what you’re doing.
You Will Have to Go to Court
It sounds a bit scary, but it’s honestly not too bad. More often than not, you’ll only have to go to one hearing called “meeting of creditors“. It’s pretty straightforward and involves answering some questions from the trustee and your creditors. In my case, none of my creditors even showed up.
There are Mandatory Classes
There are two required classes that must be taken during the bankruptcy process:
Pre-Petition Class: Taken before you file to ensure you’ve exhausted all other avenues of credit solutions before bankruptcy.
Post-Petition Class: Taken just before your bankruptcy is discharged to counsel you on how to better manage money and debt in the future.
Both classes are easy and can be taken online in the comfort of your own home. They run $25-35 each.
Not Everything is Wiped Clean
When I was young, I thought that bankruptcy meant you no longer had to pay any of your debts. Nothing could be further from the truth. To start with, you will have to make monthly payments to your creditors via the trustee. However, these payments will be significantly lower than what you were paying before.
There are some debts that cannot be discharged at all:
Court Restitution Orders
You can’t use bankruptcy to completely wash your hands of debt, but it will make a significant difference in the amount of money you end up paying your creditors.
Bankruptcy Will Change Things
Despite the title of this article, it’s important to know that you will not walk away from a bankruptcy unscathed. It is not a process to be undertaken lightly, as it affects things for years to come.
A bankruptcy is reflected on your credit report for 10 years. You can still get credit, but you may be charged higher interest rates, receive lower credit card limits and have limited access to loans.
It will also affect your ability to buy a home or even rent one! Most landlords and rental companies check your credit before they approve a lease arrangement, and a bankruptcy is usually seen as a sign of high risk tenant.
Recovery Takes Work
Re-building your credit isn’t easy. With high interest rates and the inability to file bankruptcy for another seven years, you have to be very careful with how your go about the process of recovery.
Some great ways to reestablish your credit are:
Get a secured credit card. A secured card functions like a debit card in that you put money in the account beforehand. However, your payments are reported to all three major credit bureaus and go toward building your credit score.
Pay your bills on time. It seems like a no-brainer, but it really makes a difference!
Do most of your business through one bank or credit union, through which you have a checking account, savings, and a credit card. Being a member in good standing can lead to better account perks later on.
Keep Your Chin Up
You may feel guilty or ashamed after filing bankruptcy, but many people have been in your shoes. Accept things for what they are, reflect on how you can change your financial habits for the better and work toward a debt free future.
Remember kids, it’s not the end of the world!
Katherine McDonald is a writer and business major from Portland, Oregon. She has been happily discharged from her bankruptcy for two months and is working hard on rebuilding her credit so she can buy a home. When she’s not writing, she enjoys running marathons with her boyfriend and beating him every time. You can find her on Google+