More than a million Americans each year ask the question after the bankruptcy discharge court papers arrive in the mail: Now what?
They've gotten the speech that this specter of bankruptcy will follow them around for five to 10 years. Recovery doesn't start after a decade, though; it starts immediately.
This is how you do it:
We live in a credit society. You can pay cash for gas and groceries, but when it comes time for cars and appliances, credit will be needed, said Gail Cunningham, of the National Foundation for Credit Counseling.
A year ago, there might have been unsolicited credit card offers in your mailbox the day after discharge, but in this economic environment with the credit crunch, lenders are returning to a more traditional lending standard, Ms. Cunningham said. Lenders will want to see a track record of how you handle credit since bankruptcy.
Now comes the rub. How are you supposed to build a good track record with credit if you can't get it in the first place?
Ms. Cunningham suggested trying to obtain a credit card with a co-signer. Or, sign up for a secured credit card, which uses a $300 to $500 deposit from you as collateral. There's no risk to the issuer because of the collateral.
"Charge a modest amount that can be paid in full each month," she said. "Pay it off responsibly, and before you know it, you're going to be granted an unsecured card."
Gas cards or retail-store cards are another option, Ms. Cunningham said. They are usually easier to get than the general Visa or MasterCard, but often have a higher interest rate.
Ms. Cunningham said to rebuild slowly; don't grab every card available, because lenders will see you as desperate for credit.
It's already better
The fact that unsecured debt is gone has already improved your financial situation. Not only are the monthly bills gone, but the smaller debt load -- or no debt whatsoever -- has reduced one of the concerns that will come up when considering you for loans: your ability to pay back the money.
Ms. Cunningham said there will be lenders looking at bankrupt people as better risks because their earnings-to-debt ratio improved.
She cautions you to do your homework on offers to make sure there is no one taking advantage of you. Make sure fees don't eat up your collateral on the secured card before you've even used it. Make sure the interest rates aren't exorbitant.
You are applying for new credit to adjust your credit score. A good track record lifts the score. A higher score equals lower risk, which equals a lower interest rate, Ms. Cunningham said.
That two- to three-year wait before getting a mortgage is a rule of thumb for a reason.
Mortgage bankers want to see you re-establish credit and then create a new track record of paying new debts, said Frank Lee, of First Bank mortgage in Augusta.
"It is actually easier for us to do a mortgage for someone who's been in bankruptcy and re-established credit," Mr. Lee said. "There are people who come to us with collections or judgments who are under the impression it will go away eventually.
"That is a situation where I might not be able to do a mortgage. If they declare bankruptcy and re-establish credit, we can help them."
The number of years you'll wait before getting a mortgage depends on the kind of bankruptcy and the reason you went bankrupt, Mr. Lee said.
Disaster-based reasons for a bankruptcy -- death, divorce or job loss -- are going to get a more favorable response than a run-up on credit cards and money mismanagement, he explained.
Mr. Lee said there are normal, nonsubprime mortgages available for people who are bankrupt.
"FHA and VA loans are the most lenient and flexible," Mr. Lee said. "Fannie Mae and Freddie Mac are more strict. The wait goes up to five years if there was a bankruptcy and a foreclosure."
A person in Chapter 13 needs authorization from the court before buying a house, so that letter confirming there is enough income for the person to buy a house is reassuring, Mr. Lee said.
While you're shopping around for a car, shop for the right financing deal, too.
The "bad credit, no problem" ad may be no problem for the auto dealer, but it could come with consequences for the borrower, Ms. Cunningham said. The interest rate could be very high and add thousands of dollars to the vehicle's payoff.
The letters from local auto dealers with offers of special financing programs for people who are bankrupt will begin appearing soon after the discharge.
Car loans are likely to be tracked on credit reports, so a good payment track record will be useful in boosting a credit score.
Ed Templeton, the president of SRP Federal Credit Union, said an auto loan request needs to be reasonable to open the door of possibilities. It needs to represent a need more than a want.
Mr. Templeton said if it comes too soon after discharge it might be seen as though the person didn't heed the lesson of bankruptcy and might be headed right back down the same path.
"Lenders like stability. They like for you to live where you live for two years and work where you work for two years. No job-hopping or apartment-hopping. Puts you at a lesser risk to them. It is all about the risk," Ms. Cunningham said.
Even if the interest rate is high, a year's worth of good payment history could turn into a chance to refinance the loan into a lower rate.
Credit checks will pop up when you go seeking certain services. Insurance companies and wireless phone providers will check credit. So will apartment managers.
Credit counselors suggest knowing your credit scores before going into these circumstances.
In the case of apartments, especially in apartment complexes, they will have minimum requirements on an acceptable credit score or years after a bankruptcy.
Keep in mind that most apartment managers have the ability to override a credit decision if you can show them evidence that you will be able to make your rent payments every month.
Offering to pay a higher security deposit can be helpful.
Credit is only one influence on whether you're going to be able to rent an apartment, a good rental and utility payment history will favor you, counselors said. An eviction can be the death knell on trying to rent a new place.
Reach Tim Rausch at (706) 823-3352 or email@example.com.