LAB, Part 4: Experts and bankruptcy verterans agree that ‘unshackling’ from the past can lead to a brighter future, complete with access to home and car loans

May 27th, 2010 by Mike Hinshaw

[Editor's Note: This is the final part of a four-part series on Life After Bankruptcy: Part One is here; Part two here; Part three is here.]

Geoff Williams is a successful columnist, blogger, business journalist and personal-finance writer.

You’d think he’d have known better, but years of mismanaging his own finances left him in a deep hole, with more debt than he could handle. In other words, his crisis was not a sudden emergency event, but a pernicious series of events. Finally,  in 2008, he decided to file for bankruptcy protection.

Went bankrupt, wrote a book

Later, a peculiar thing happened: He got asked to co-author a book . It’s called Living Well with Bad Credit: Buy a House, Start a Business, and Even Take a Vacation No Matter How Low Your Credit Score and is available from Amazon.

There’s a tremendous Jan 28 interview with Williams at WalletPop.com, where he usually writes about personal finance. In this Q&A, entitled “Life After Bankruptcy: Living Well with Bad Credit,” he answers questions from a fellow writer about “coming out” to family, friends, and readers about his own bankruptcy. He explains the genesis of the book deal, describes the slippery slope to bad credit–including signs that should raise red flags–and discusses both the effects of and returning from bad-credit purgatory. It’s a good piece, well worth a full read, but here’s some excerpted highlights:

Friends are still friends

Responding to a question about the stigma of bankruptcy, he says, “As for what our neighbors, my friends and others think, well, I’m in the process of finding out. My parents wish I’d have kept my mouth shut and had written about anything else, but I’ve talked about my book on my Facebook page, so I know that some of my relatives know about the book and may know about my financial history. And some friends have learned about it and are still my friends. I haven’t shied away from my bankruptcy, but you know, it’s not like I go to my daughters’ parent-teacher conference and say, ‘But before we discuss how Lorelei’s coming along with her reading and how Isabelle is faring in social studies, I really should tell you all about my financial history…’ ”

Asked how people wind up in debt trouble, he mentions singular, tragic events, “For some people, bad credit really is out of their control. They’re stricken with cancer, for instance, . . .  [o]r there’s a divorce . . . .

“But with most people, it begins with one mistake” that “snowballs,” such as buying a car that’s too expensive for one’s income, which leads to not paying off credit-card balances–which is now two blunders. “You’re paying too much for a car every month, and you aren’t paying down your credit card debt. At some point, you realize what’s happening and become concerned about the credit card debt, so you pay it down more, which is great, but because of that, instead of cutting back on your entertainment budget, you stop putting money in your savings account. And now every month, you’re making three mistakes.”

Be creative

Asked about living well with bad credit, Williams says flat out that “Living well with bad credit is harder than living well with good credit.” He mentions having  “more hoops to jump through, and more hassles to deal with.” Examples include renting an apartment and booking hotels and rental cars for a vacation. But none of those are impossible: “You can [get an apartment] . . . . But you’re going to have to look longer and harder for one and be more creative in the way that you look for an apartment.”

As far as taking a vacation, “. . .things get trickier because many hotels and rental cars treat debit cards differently from credit cards. If you book a hotel for one night with a debit card, the hotel might hold enough money to pay for an extra night and then not release that money until several days later.”

Light-bulb’ moments

The single-most telling Q & A, however, may well be the following, quoted in its entirety:

WalletPop: Having started out with good credit, and then living well with bad, what have been some of your “light bulb” moments?

Williams: You know, as crazy as it may sound, I think filing bankruptcy was one of the smartest financial decisions I’ve ever made. My light bulb moment was realizing that if I was going to have any sort of financial future, and that if I wanted to save for retirement and not someday become a ward of the state, and that if I had hope of putting money away for my daughters’ college, I had to unshackle myself from my financial past.

How to think about new loans

In a May 3 piece for WalletPop, “How to file bankruptcy and still get a loan,” Williams addresses home mortgages, auto loans and personal loans.

Now, this is critical to bear in mind. Often critics of bankruptcy harp on the length of time that bankruptcy lingers on a credit report. However, often overlooked are two important considerations:

  1. the equal or longer amount of time a poor credit rating will hang on for someone who keeps making minimum or no payments to creditors, and
  2. the relatively short period required for a bankruptcy to be discharged.

So, yes, a Chapter 7 filing remains on your record for 10 years, and Chapter 13 for seven; but the Chapter 7 is normally discharged within 60 to 90 days from the meeting with creditors; the Chapter 13 discharge follows the payback period, normally three to five years, with the discharge papers arriving anywhere from a few weeks to a few months after the final payment.

What this means is that a Chapter 7 filer could receive credit-card offers within months of the initial filing, a Chapter 13 filer might get similar offers within four years. The important thing to keep in mind is to zealously, relentlessly focus on what caused the problems–if credit-card mismanagement was the culprit, a cash-only lifestyle might be in order. Certainly, creating–and sticking with–a budget will be crucial.

Higher interest rates, but still obtainable

Now, what has Williams learned about home loans? The biggest pill to swallow is that you’ll pay higher interest rates than someone without  a bankruptcy on record. The silver lining is, home loans can still be possible. Williams indirectly quotes a senior vice-president of a company that operates in 25 states: “if you’ve had a bankruptcy, it typically takes five years to get a conventional home loan and two years if you’re going for an FHA loan.

“But it’s possible to get one sooner, if you aim for an unconventional loan, like a lease-option, where you rent a home while saving up the money for your down payment and biding your time until your credit score goes up.”

The main thing is “to get back in the game” by starting immediately to rebuild your credit record and FICO score. One tool is the secured credit card, described at this bankrate.com article as something you go for after establishing “good financial habits”:

Using secured credit cards

” ‘A general guideline would be six months [after your discharge],’  says Whelan, a bankruptcy judge for 12 years.”You’ll put money in an account and the credit card company will give you a credit limit of that same amount. When the bill comes in, you pay it, as you would a normal card. You get the deposit back only when you close the account or switch to an unsecured version. Some card companies may also be willing to give you a credit limit higher than your actual deposit, says Curtis Arnold, founder and spokesperson for Cardratings.com. Tip: Look for a card that reports to one, and preferably all, of the credit bureaus.

“The good news: Many secured cards report as unsecured cards, says Arnold. ‘And assuming your account’s in good standing, once you’ve had it for a year you should start getting halfway decent offers on on unsecured cards.’ ”

Taking care of fundamentals

Another thing–even if you eschew a credit card, even the secured version, do keep impeccable records. And no matter what, pay all bills on time. Doing those two things and saving up a personal emergency fund will go a long way to demonstrating to lenders that you’re taking financial responsibility.

As far as auto loans go, Williams recounts a tale of having his car go kaput and being able to get financing for a “fairly new car, a 2006 Subaru,” even though he was self-employed. “I suspect anyone with a steady income — and especially if you have a place of employment — will be able to get a car, even if your bankruptcy was yesterday. Granted, my story is just one example, but I’ve talked to enough experts over the past few years to come to this conclusion: Loans are tight, but the car industry, frankly, wants very much for you — and everyone under the sun — to buy a car. So they will do what they can to make a sale happen.

“That is, again, if you have real proof of income and if you can stomach a higher interest rate than what the sticker and commercials are promising.”

‘Second-chance’ auto loans

Also, there are companies that specialize in sub-prime auto loans. Some of them use bankruptcy discharge filings to solicit new customers. Once again, there is a difference between Chapter 7 and Chapter 13 filers. The following is from an April 27 post at autocreditexpress.com:

“A Chapter 7 bankruptcy is fairly short and is usually over in a matter of months. A Chapter 13 bankruptcy can last either 3 or 5 years. If you are currently in a Chapter 7 bankruptcy, you will need to wait until it has been discharged.

“If you are currently in a Chapter 13 bankruptcy, you will need to contact the Trustee and have him request an order to incur additional debt from the court. Since your Chapter 13 bankruptcy is based on your income and expenses, you need to get permission from the court before you take on any significant additional debt, such as a car. If the court approves the request, they will furnish you with the document. Make sure you have this document when you apply for a car loan, because you will need this as proof that the court will allow it. The order also states the maximum amount the court will permit you to borrow.”

Notice, however, none of this applies to a dismissed bankruptcy, which means the filer has failed to follow the terms of the court (most commonly by not making required payments). “If your bankruptcy has been dismissed, no bad credit lender will approve you for a second chance car loan.”

UPDATE: Please see more info about auto loans, bankruptcy and “reaffirmation agreements” here.

Personal loans

As for personal loans, Williams indicates that anything is possible but in most situations it will be a challenge until your credit score has improved. He says Hale Walker, the mortgage company VP, advises that the worst thing to do is “hunker down and hide . . .with every passing day, as you start restoring your credit, that bankruptcy becomes a little less significant.

” ‘And if you’re working on your credit and can show lenders you’ve been paying your bills, they might be able to put together a package that makes sense,’ says Walker. ‘You’re going to have much better luck if you pay your bills and live your life than if you do nothing and just wait for a magical two years to have passed and then start trying to get a loan.’ ”

To re-emphasize, the experts are in agreement:

  • Keep steady income; work two jobs if necessary, or get part-time, supplemental work.
  • Rectify past behavior or money management issues.
  • Create–and stick with–a budget.
  • Maintain good records to be able to show to a lender.
  • Get pumped up about rebuilding your credit record: Be persistent.

Additional resources

Related links:

April 4, New York Daily News: There is life after bankruptcy; Credit could thaw in 18-24 months

August 16, 2009, Parade: How to Bounce Back from Bankruptcy

August 4, 2009, “The Smarter Wallet”: How to Build Good Credit and Clean Up Bad Credit

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13