Real Talk: What happens after you declare bankruptcy?

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Death. Divorce. Job loss. Sometimes tough stuff happens. Unfortunately, these not-so-great milestones often come with a financial impact. So, what do you do if you’re getting a divorce? Or if a loved one suddenly passes away? Or if you find yourself with more debt than is comfortable? In our series, Real Talk for the Tough Stuff, we’ll tackle some of these situations head on with the honest financial advice you need to get through and get on with life.

Real Talk for the Tough Stuff: Surviving bankruptcy

Tackling serious debt can feel like an impossible hurdle. It can take years to pay off, requires significant lifestyle changes, and can take a toll on your mental health.

But what happens if you’re faced with insolvency? Meaning, you are truly unable to meet your financial obligations, no matter how much you cut back on expenses. We spoke to Sandra Pye, Manager of Credit and Collections with Eagle River Credit Union to better understand bankruptcy—when is it an option, what happens when you declare, and how to rebuild afterwards.

The first thing to know? Bankruptcy is not a clean slate for your debt (despite what The Office’s Michael Scott might have you believe). It involves filing with a Licensed Insolvency Trustee who will handle all of your assets and liabilities during the bankruptcy period.

What happens while you’re in bankruptcy?

“While declaring bankruptcy does absolve you of your debt, it should always be a last resort,” warns Sandra. “It will affect your credit for six years or more and can be very mentally challenging. It’s not a cure all. If you’re considering bankruptcy as an option, you should always chat with a financial expert first. They can look at your situation and tell you if there are other options.”

While you’re in bankruptcy, not only are you unable to borrow, you will need to attend credit counseling. You will also need to give up some of your assets—though depending on the terms, certain items can be excluded, like your house and one vehicle.

“When you file for bankruptcy, your trustee handles all of your finances,” notes Sandra. “If all of your payments to your trustee are made on time, you can be discharged from bankruptcy after nine months. This means that you’ve completed the process and are discharged from the debt that you owe—that’s when it’s time to rebuild your credit responsibly.”

Rebuilding after bankruptcy

One of the myths around bankruptcy is that people who declare are irresponsible with their spending. But bankruptcy can also be the result of unexpected life circumstances, like the sudden loss of a job or medical expenses. Sandra explains the conditions that lead to the need to declare can impact your ability to borrow moving forward.

“You have to give a reason for declaring bankruptcy when you file—so there are circumstances where you can get credit after you’ve been discharged,” she says. “However, if you’ve overextended your spending, it’s much harder to get credit.”

Bad habits can be tough to break when it comes to your finances, but there are steps you can take to rebuild. It starts with tracking your money carefully, living within your means, and paying every single bill on time.

“The most important thing to do is make all of your payments on time­­,” advises Sandra. “Even your phone bill is reported to the credit bureau, so you need to be diligent. Spend less than what you earn and start working on your savings.”

Since you will be dissolved from your debt at this stage, Sandra points out this will help free up your cash flow. Any money that would have gone towards debt payments can now be funneled towards your savings account.

“You need to prove you can handle money,” she says. “Once you have some savings established, you can use that to secure a line of credit or loan. Then, keep paying on time. If after bankruptcy you miss a loan payment, you will have a very tough time borrowing in the future. You have to be disciplined in order to get credit­­—and never borrow more than you can pay.”

Obtaining a copy of your credit report on a regular basis is a helpful way to better understand where your credit score stands. And a financial expert can work with you to build a budget and make a strategy for getting back on track.

Sandra’s final advice for anyone exploring bankruptcy­? Do your homework.

“Make sure you understand the implications of bankruptcy before filing. Even if your debt feels overwhelming or you’re worried about paying your bills, your financial institution may be able to help. There are options, like interest only payments or deferments, that can help get you through a tough time financially. Ask questions and reach out for help at your local credit union before you make any decisions.”