Some people think that bankruptcy is the final chapter of their financial lives. This is not true. Bankruptcy can be a new beginning. Your recovery from bankruptcy is a process, just like the seasons of the year. Below are the steps that will take you through what I call the “7 Seasons Strategy” to bankruptcy recovery.
Step 1: Find the problems that led you into bankruptcy and fix them The first step of this strategy is to make some life changing decisions in how you handle your finances. Find the problems. Fix them. Remember, when you filed bankruptcy, it didn’t fix the problem. Bankruptcy simply gives you a fresh start. Think about it. There was something, maybe several things, that led to your bankruptcy. Maybe it was a poor investing decision, poor credit management, a job loss, a divorce, a major medical event that zapped your savings, a death in your family, no cash reserve to weather a storm, or some combination of the above. Of course nobody can avoid the unavoidable, but you can learn from your experiences and take steps to make sure you are protected the next time something unexpected happens.
Step 2: Go back into debt strategically Go back into debt using only mainstream lenders—no high-interest finance companies.
Strategic debt is when you borrow money from a lender to improve your credit rating. Don’t be afraid to go back into debt after your bankruptcy. It’s just like learning to ride a bike. When you fall off you have to get back on until you figure it out. The same concept applies here. Get back into debt cautiously and on your terms, but don’t avoid it. Stick with mainstream low-interest lenders and keep the amounts you start with manageable. As you get more comfortable, begin focusing on credit that gives you some sort of tax or net worth benefit, like a home or some other appreciating investment.
Step 3: Pay your bills early or on time Commit to paying your bills early or on time. This is the key for strong financial foundation. One of the last things a lender wants to see on your credit reports is one or more late payments. By paying early or on time you will guarantee that none of your lenders will ever report your account as being late. Late payments (and other negative credit items) account for 35% of your FICO ® credit scores. By paying early or on time you are guaranteeing that you will earn the most possible points in the “payment history” category. This is a must for anyone trying to enter the land of the 780s.
Step 4: Remove inaccurate information from your credit reports Work hard to remove any inaccurate, incomplete, misleading, unverifiable, or outdated information from your credit reports. This is nothing more than you exercising your rights as defined by federal law. The Fair Credit Reporting Act states that anything on your credit report that meets any of the above conditions must be removed. There are often inaccurate, incomplete, misleading, unverifiable, and out – dated items left on your credit reports after bankruptcy, and these can have a significant negative impact on your FICO scores.
Step 5: Manage your credit to increase your credit scores Make a goal to increase your FICO credit scores to 780 or above. This doesn’t happen overnight. Along the way to FICO credit scores of 780, you should create more attainable goals for yourself. Maybe 700, and when you reach 700, 720, etc.
It’s like training for a marathon. You don’t go out and run 26.2 miles your first day out. You work your way up to your ultimate goal. You don’t have to go from 550 to 800 in a week. But, you DO have to start right away. The sooner you start, the closer you will be to reaching your goal. Set a goal to increase your FICO ® scores by 50 points every 6 months until your scores are all above 780. Then change your strategy from an “improvement” goal to a “maintenance” goal.
Step 6: Learn to live off a percentage of your income Just look around you and see how much money you’re needlessly spending every month. Do you really need cable television and all the premium stations? If you smoke, how much money are you wasting on cigarettes? How many Starbucks’ $5 coffees are you drinking every week? Look around and you’ll be surprised at how you can cut back without affecting the quality of your life one bit. People generally adjust unconsciously to whatever their income is. If we make $100,000 a year we’ll adjust our spending to fit $100,000 a year. If we make only $45,000 a year, we’ll adjust to that amount. Take that one step further. If you’re a two-income family, live off of the higher of the two incomes. Take the lower of the two incomes and save every dime of it. After a few months you’ll naturally adjust to living off of one income and you’ll see a fast-growing savings account. If you are a one-income household, try to live off of 70% of that income and save 10%, invest 10%, and give 10% to charity. It will be difficult at first, but be persistent. The reward you will get from this will be worth more than anything else you could buy with the money. If you just invest the $5 a day you spend on coffee at 5%, after 40 years you could end up with $231,483!
Step 7: Strive to use credit as a convenience, not as a necessity The U.S. is the most “credit hungry” country in the world. It’s the only country on the globe that views credit as a right rather than a privilege. That’s not a good way to look at things—especially if you are bankrupt. You should use the credit system to your advantage. Use your credit to invest in real estate. Use your credit cards to buy things in a way that will improve your FICO ® credit scores. Don’t become a prisoner of the credit system (e.g., purchasing more than you can afford on credit and paying the minimum balance due each month—you’ll never get ahead that way). It’s hard to escape. Step 8: Consider paying back the debt you filed bankruptcy on This step is optional. Obviously, you don’t have to do this. But, once you’re fully recovered, look back at all the debts you discharged, and consider how you can pay them back, slowly. Some lenders won’t issue you credit again until you’ve paid them back. That means you can have FICO scores in the 800s but can’t get a credit card from some banks because you discharged a debt that you owed them many years ago. American Express ® does this. Again, this step is optional. If it makes you feel better then go for it.