Filing for bankruptcy? Know fact from fiction

PHOENIX - While bankruptcy is a scary word for many it's clearly becoming a reality for many with a total of 1.5 million personal filings in 2010.

Bankruptcy filings in the U.S. are up 14 percent from 2009, according to numbers released by the Administrative Office of the U.S. Courts, and experts expect that number will rise.

The idea of bankruptcy is daunting for many and perhaps that is due, in part, to some of the myths surrounding it.

We talked with Certified Financial Planner George Collett from Your Source Financial in Phoenix and asked him to help us dispel some of these myths.

Myth #1: The Government changed the laws, now I can’t file for Personal
Bankruptcy.
Collett says:
“Contrary to this myth, changes made by the US Congress in 2005 still allow any
debtor to file for personal bankruptcy.

Although this new bankruptcy law has prevented some people from being able to
file bankruptcy, most people are not turned down from filing bankruptcy
protection.

There are additional requirements for people seeking bankruptcy like; the debtor
education course and credit counseling briefing.”

Myth#2: I can't get credit for at least 2 years after Chapter 7 bankruptcy.
Collett says:
“It is a cold hard fact that you can't get a mortgage for at least 2 years.
Also, getting a car loan on decent terms will be a challenge but, getting a credit card is quite possible.

It is quite important to rebuild credit after bankruptcy. Try to get a secured credit card
almost immediately.

While many claim that you should put time and distance from the bankruptcy filing date, we believe you should start the process as soon as possible. Indeed, once you get one credit account open, you can try to get another to continue rebuilding your credit history.”

Myth #3: There is no bright side to bankruptcy and I’ll never recover.
Collett says:
“Life after bankruptcy has its perks. For the first time in a long time, you don't owe
any money and don't have to deal with debt collectors. More importantly, you
probably learned a valuable lesson. Now let's consider steps you must to take in order
to rebuild credit after bankruptcy -

1. Open a checking or savings account, possibly in a large bank, it will help you
to get an unsecured credit card with this bank down the road when your credit
history is getting better.

2. Try to save at least 25% of your paycheck, get a second job if necessary. Now
that you have a clean start it should be feasible. Once you have several
hundred dollars saved, get a secured credit card, either from the bank you
opened account with or any other with decent terms.

3. Pay every bill you still have, e.g. utility, rent on time.

4. Try to get store and gas company credit cards. Don't apply for more than one
in a week at this point. Get a cosigner if you have to.

5. Try to get an inexpensive used car in about 8 months after your Chapter 7
bankruptcy filing. You will need a cosigner of course. If you can pull this one,
you will take a giant leap forward in your credit rebuilding adventure, as you
will add an installment loan to your credit history. See if some GM or Ford
dealers would get you a car loan, considering their situation, they just may.

6. Live a bit below your means for the first 6 months to save as much as
possible.

7. Check your credit reports every 4 to 6 months, making sure that all
information accurately reported, especially bankruptcy related records and
new, post Chapter 7 good records.

8. Try to minimize the number of inquiries on your credit report, once you have
established few good credit lines.”

Myth#4: I’ll always have a bad credit score.

Collett says:
“Your credit will be affected based on a number of factors such as current credit status, type of debts, type of bankruptcy you file, etc.

Make no mistake; your credit will likely be negatively affected.

Chapter 7 bankruptcy stays on your credit report for at least 10 years.

Credit scores can start to improve in about 18 to 24 months.

Plan on a score in the 400’s in two years and very low 500’s after three
years.

Once your debt is relieved (or reorganized), your credit score will start to
improve.

Bankruptcy is a chance for you to start fresh and rebuild your credit
score.”