There is no doubt that deciding whether or not to file bankruptcy is one of the toughest choicest you’ll ever have to make. The consequences, and what they mean to you, ranks up there with getting married, choosing where to live and other deep impact choices. Here are 3 questions that can help you decide whether bankruptcy is the right choice for you. These aren’t the only questions you should ask yourself but they are at the core of making this decision.

How Much Do You Owe?
I constantly get asked what the minimum is to file bankruptcy? There is no minimum. As a rule of thumb I believe that if you have over 12k in debt then bankruptcy is worth considering if you are struggling to pay the minimum amounts due monthly. Use the following calculator to get a rough sense of how many years it will take for you to pay off your debt. http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx What’s astonishing about seeing these numbers is that 1) this calculation assumes you won’t ever add a penny more of debt and 2) you will always have the cash flow to pay. Unfortunately, unexpected expenses, such as new tires, medical visits, dental procedures and such come up. Job setbacks also come up. Though there is always the possibility you’ll be making more in the future there is also the possibility that your job doesn’t afford you that security. So think about those things; what you owe and the possibility of you really being able to pay that off in the future. If you’re considering bankruptcy my guess is that in the short-term you are feeling the pain of barely being able to (or not even being able to) pay the minimum but is this situation temporary? Consider the long-term financial impact of what you owe.

Do You Have a Post-Bankruptcy Plan?
Sometimes people file bankruptcy and find themselves no better off financially because they don’t have a plan of what to do after the bankruptcy. They think short-term only. For some, they file bankruptcy because they lost their job and so can’t pay the bills. Unfortunately, even after bankruptcy they still don’t have a job and so find themselves being unable to keep the roof over their heads and/or they begin borrowing from people to make ends meet. In other words they are back on the path to debt. Make sure that even after you’ve filed bankruptcy you have a solid plan for getting back up on your feet. Make sure you can afford housing and the basics (i.e. utilities, food, etc.). If you don’t have that certainty I rather have you wait then on filing until you at least have a good idea that bankruptcy is helping you both in the short and long-term.

What Will Bankruptcy Mean For You?
Can you deal with the consequences of bankruptcy? On one hand you’ve obtained as much of a clean slate as possible financially. Its almost like pressing control-alt-delete on your finances. Some people describe it as winning the lottery because one day they have say $35,000 in debt and then one day its discharged. But every action has its consequences. Bankruptcy takes a hit on your credit report (it gets reported there for 10 years) and so, especially the first couple of years after bankruptcy, you will find that it is tougher to get credit or great terms on a loan. This won’t always be the case. Assuming you start rebuilding credit (see my other posts on how to do that) by years four and five you might find yourself having as much credit as other people who have never filed bankruptcy. But the question remains, are you willing to do what it takes to get past the initial consequences of a bankruptcy? Do you have the discipline to not let this be a permanent financial setback? I want my clients to really want to declare bankruptcy. Many need to but unless they really want to some part of them isn’t completely ready for it. They are afraid of the consequences, the stigma, of the pain they associate with it. I want my clients, as scary as it seems at times, to overall have a feeling down deep inside that what they are doing is what’s best for them. Only by seeing bankruptcy in a positive light will you be acting from a place of power and not fear.

I’m sure there are other questions that will help you decide whether this course of action is the best one for you. I’ll be the first one to tell you that bankruptcy isn’t for everyone. I want it to be a way that you obtain financial peace of mind, again. But that can’t happen unless you truly are able to answer the above-questions from a place of power and feel certain in your decision. May you decide in what is in your best interest…

 

Part II of the series: Getting Credit 

You’ve declared bankruptcy. Your debts have been discharged. Now what? Well, the good news (unless you have student debt, owe recent taxes or have a similar non-dischargeable debt) is that you should have a fairly clean slate, which means you don’t owe anything. As long as you have some income coming in and live within your means you should get some major financial breathing room after bankruptcy. Eventually though, especially if you will continue to live in the western world where credit is pretty much a necessity, you will NEED to rebuild your credit history. Before you do anything make sure you’ve read my post above about your “financial blueprint”. Once you’ve done that proceed….

Step 1 is to figure out where you are at now and ensure your report is as “clean” as possible. This means getting a financial snapshot of what your credit report looks like. So I say about 4 months after your bankruptcy pull your credit report (available free once a year from www.annualcreditreport.com) and take a look at what it says. After a Chapter 7 bankruptcy your previous credit card and personal debts should now be discharged and there should be a notation saying so next to each debt. If for some reason a creditor is still showing a debt (and you included this in your bankruptcy) contact them immediately. Send them a copy of your discharge notice with a letter explaining the status. You can’t as easily get post-bankruptcy credit if some pre-bankruptcy debt is still showing on your report so take care of it.

Step 2 is to apply for credit and get a line of credit. I know, I know, it seems counter-intuitive that only a few months back you had to declare bankruptcy only to now be looking for more credit. Remember, unless you plan on living strictly off cash for the rest of your life the world pretty much operates on credit. This means that if you plan on buying a house in the future or a car, unless you can pay for it with cash, you’ll need to finance it. To do so you need to have re-established your credit history. So yes, seems crazy but start getting credit. You may already have received offers in the mail and if that’s the case you already know that a lot of these offers just don’t seem that great. Because they are not in some ways. Many companies (remember you are recently out of a bankruptcy) will limit the line of credit they are willing to give you (some may give you as little as $250, maybe $500 if you’re lucky). Not only that but many credit card companies will charge you an upfront “annual fee” (around $89 is not too uncommon) plus there might even be a “maintenance fee” of some kind (another $35 or so dollars). “What????!!!” you might be saying. Yes unfortunately rebuilding your credit is going to take a little investment up front. Do it responsibly and it will pay off down the line. My suggestion is you go on-line to get the best deal by visiting www.bankrate.com and searching for a credit card company that can give you the best deal based given your recent bankruptcy. BEWARE, there are unfortunately a lot of scams out there and so you want to make sure you do a bit of research. If it seems too good to be true, guess what? Yes, it probably is too good to be true. Here’s a recent FTC alert about such scams www.ftc.gov/bcp/edu/pubs/consumer/credit/cre25.shtm. Also, getting a secured credit card is a great idea. That’s where you basically deposit a specific amount with the credit card company (say $500) and they then in turn give you a credit line for at least that much. They know they’ve got your money already up front and so they may be more flexible with you. Again, www.bankrate.com is a reliable, trusted source for secured credit cards. How many credit cards should you get? I say at least one, preferably two so that you can manage multiple lines of credit. Secured or unsecured?

Step 3 is to manage your line of credit.  Because you’ve been burned by credit card debt in the past you don’t want to experience that ever again and so the key will be in managing effectively your new line of credit. My suggestion is that you pick a category of something (like gas or groceries) that you know more or less how much you spend on a monthly basis. So now, instead of paying cash or debit for that category put it on your credit card AND pay it off at the end of each month. So for example, say you know you spend about $150 of gas on your car each month. Each time you pump, put it on your credit card, and when the bill comes due PAY IT IN FULL. You do this consistently and at some point in the future (maybe a year, maybe less depending on the credit card company) they will increase your credit line. At the same time your FICO score should be going up every few months. I suggest you pay the few dollars to get your FICO score (www.myficoscore.com) and review your FICO every 6 months. You should see small but incremental improvements. By the way, unless you’re willing to pay a monthly fee that can quickly add up I don’t think some of the “monitoring services” a lot of companies provide is worth the cost.  That’s one of those packages they sell you where they say they’ll monitor your credit score, send you e-mails, alert you of fraud, etc. Sounds nice but ultimately I don’t think necessary.

Step 4 is to begin negotiating a year or so after your bankruptcy with your credit card companies to reduce the APR, waive the annual fee and/or increase your line of credit. If you’ve paid consistently and have paid in full each month they should be flexible. If they are not flexible take your business elsewhere. This means you repeat Step 2 above. By now you should see improvements in the offer (such as no annual fee) and though you may jump from one credit card company to another a couple times the first couple of years (and reducing your FICO score temporarily because that’s one of the factors that impacts your score) after a bankruptcy I believe that ultimately a better line of credit and terms more than makes up for this. By the way, if you do leave a credit card company, make sure you request in writing that any accounts you want closed are “closed at the consumer’s request.”

And there you have it. In a nutshell, 4 easy steps to do (and repeat as necessary) as you rebuild a strong and solid financial future.

Part I of the series: Your Financial Blueprint

You declared bankruptcy, had your debts eliminated (in legal parlance “discharged”) and may be thinking, “Now what?” How do I start rebuilding so that in the future I have financial stability and even financial freedom? Here’s what your first step needs to be.

First off define what financial stability and financial freedom mean to you. The answer to these questions will help you set a definite goal. For some people financial stability means they have a specific amount saved up, are earning a specific amount each year and/or have so much in assets. For others, its simply being able to pay the day to day bills. And yet for others its about being able to provide for others. I don’t know what the answer is for you but my first piece of advice is that you find out.

If you don’t define what financial stability and freedom mean to you then I hate to be the bearer of bad news but there’s a high probability you’ll end up in bankruptcy again in the future because you haven’t broken the “pattern of your financial blueprint”. Here’s a good analogy to help you understand this by what I mean pattern. Ever read or heard about those people that win the lottery only to have nothing years later. If you haven’t here’s a story about a few of them: www.usatoday.com/news/nation/2006-02-26-lotteryluck_x.htm  What’s interesting is that despite all that money these people still somehow managed to squander it all away. What happened? My belief is that these millionaires never broke the pattern of their financial blueprint. Financially they may have been rich for a while but they were still deficient in their way of thinking and/or in their habits. In other words, they kept playing the same song (their “blueprint”) over and over again despite the windfall they got. Don’t fall victim to the same mistake.

In a way, declaring bankruptcy is like winning the lottery. One day you had $50,000 in debt and the next day you have a clean slate. Years down the line you may find yourself in debt again because you began doing some of the same things you did in the past that got you to go into debt in the first place. I’m not here to finger point and pass judgment on you. My intent is to help you understand that now is the time to take control of your financial destiny. My observation is that many people walk around not really having thought about their relationship to money, why they behave towards money the way that they do and how they can be masters over money instead of the other way around.

In future blogs I’ll give you specific tips on what you can do to establish control over your financial destiny but for now you have to focus on your “blueprint”. Here are some powerful questions that will help you get started:

What is the biggest fear I have about money? Where did this fear come from? Growing up what lessons did I learn about money from people around me?

What’s my biggest regret financially up to this point? What stopped me from doing that in the past? What’s the story I’ve been telling myself over and over about money?

What does financial stability mean to me? In other words, how do I know that I am financially secured? What needs to happen in order for me to feel this way? Make a list and have this become your checklist that you can refer to know so you know whether you are on track. What can I do right now to make this happen? What am I willing to do to achieve financial stability?

Does financial independence mean something different to me? What’s the difference? How will I know I’ve reached financial independence? Why am I not there now? What needs to change/happen in order to be financially independent?

If I had $100,000 saved up would that be enough for me? How about $500,000? What is the number (and there is a number) that I must saved up before I can say I choose to work not because I have to but because I want to?

What’s one small thing that I could, no strike that, need to do right now to put me on the path to my financial destiny?

This is just a starting point. There are plenty of books and seminars out there that can help you establish these goals. A book I would recommend is Maria Nemeth’s The Energy of Money.  Another book is T.Harv Ecker’s Secrets of the Millionaire Mind. Both books do a great job of helping you explore your relationship to money. Your psychology of money if you will. As I’ve said before, Who is the master, you or money?

Remember now that you’ve declared bankruptcy, your ability to have a positive net worth may be a lot easier to attain now because you may have a clean slate. So instead of focusing on paying off a mountain of debt, you now have the ability to save, accumulate assets and create financial freedom.  The path begins in your mind. I wish you avalanches of abundance so that you may Live & Give Richly!