What Happens to Borrowers Following a Personal Bankruptcy?

The decisions that consumers make directly following a personal bankruptcy discharge will, to a large extent, determine their finances ever after. Those borrowers that choose their steps with care and precision can successfully begin their credit over again. After all, the newly bankrupt should expect to be deluged with credit card applications and advertisement for car loans and credit lines even while they’re still in the middle of the process. It’s important to remember, however, that virtually all of these offers will boast interest rates as high as legally available – right after bankruptcy, even home mortgages (which typically maintain the lowest interest) should be over ten percent. When analyzing different options and looking at exactly what to do next, borrowers must think about the different consequences and potential repercussions of whatever they may do. They’ll want to re-start their credit lives, but they don’t want to act rashly.

Of course, those borrowers who successfully qualified for the Chapter 7 personal bankruptcy debt elimination program likely had severe financial problems that were the result of uncontrolled spending and disastrous habits that led them to consider bankruptcy in the first place. If the initial habit that was formed over decades of ignoring household budgets and indulging purchases well beyond their means hasn’t itself been dealt with – if anything, allowing bankruptcy to wipe out such debts absent the slow and painful process of debt management rewards such a habit – then it’s all too easy for borrowers to resume their original poor behaviors. Indeed, erasing debts through personal bankruptcy could lead the borrowers to end up in an even worse position than before they filed since they’ll no longer be able to eliminate new debts through bankruptcy discharge for another seven to ten years.

It’s vital for problem spenders not to return their old lives. Once consumers have assumed habitual purchasing reflexes, they must take every step possible to alter these instincts so as not to find themselves in similar dilemmas years down the line. These consumers should treat offers from credit card companies especially seriously. If borrowers’ finances do not allow full repayment of credit card balance each month, then they should probably not allow themselves the temptation. Don’t presume that just because that, following discharge, the mailboxes of the bankrupt are swimming in credit card applications, everything has been fixed. These companies are presuming the bankrupt will return to their old ways just as soon as they can.

Just because a borrower found themselves needing the protection of bankruptcy, we do not mean to imply that they’ve necessarily been spendthrifts or financially irresponsible. A good percentage of consumers newly filing for bankruptcy have demonstrated life long habits of restraint that depended on maintaining household budgets and avoiding foolish purchases. Nevertheless, medical emergencies and unforeseen financial problems such as sudden and lingering unemployment can happen to anyone, and these are the reasons that personal bankruptcy protection was originally implemented by the government. Before anything else, borrowers must ascertain if their bankruptcy was the result of behavioral recklessness or genuine mishaps.

In any event, whether the helpless victims of circumstances beyond their control or careless consumers who indulged the overly liberal availability of modern credit card systems, there are still actions that must be taken to assure later financial possibilities. After all, the process of declaring bankruptcy absolutely destroys credit reports and FICO credit scores, but the consequences do not have to follow consumers for the rest of their lives. They should especially consider house and property financing. For most borrowers, their homes are their greatest overall investment, and, around much of the country, single family residences are considered a requisite to successful family existence. For lenders, though, with the sub prime crisis a special concern, it will be extremely difficult for potential home-owners trailing a Chapter 7 or Chapter 13 to get any mortgages at all. Credit reports determine so much, and, bankruptcies can stay on credit reports for the rest of the filers’ lives. Even if the prospective home-owners can arrange financing, the interest rates following bankruptcy can be extraordinarily high – meaning that borrowers will end up paying for their homes several times over once compound interest is fully accounted for.

Now, this isn’t true for all borrowers. One bankruptcy that interrupts sterling credit reports after a single incident (like hospitalization or unemployment or some other family emergency) could be explained by competent loan officers as an oddity that may be relatively overlooked by the lenders. Obviously, hospital bills from serious illnesses that are quickly dealt with will help garner different interest rates than those resulting from a steady stream of spending without regard to responsible money management. At the end of the day, lenders do want to make sure homeowners are allowed the properties that they can afford, and they fund underwriting departments to work with mortgage loan officers to analyze credit reports and look past FICO scores or bankruptcy notations to arrange mortgages with special guidelines or loop-holes for deserving borrowers. For this reason, anyone struggling with bills clearly not of their choosing should maintain records and documentation that will help mortgage companies and underwriters argue approval.

After bankruptcies have been discharged, credit can be restored provided borrowers act seriously to minimize the damage. Obviously, altering purchasing instincts and making sure there’s no repeat event should be the number one priority. It can be as simple as taking out a pen and recording household expenses and then sticking to those while only involving credit cards for planned purchases that can quickly be repaid. In order to better credit reports and FICO credit scores, a regular program of credit maintenance must be followed, but the most important thing is not to fall back into bad habits

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