Is There Life After Bankruptcy? Sure

How to rebuild business credit and get loans after declaring bankruptcy. By Morin Bishop

Declaring bankruptcy is no picnic, and recovering your credit rating after bankruptcy isn't easy either. But it can be done. Just ask Mike Palladino. The 35 year-old electrician from Quincy, Massachusetts, filed for Chapter 7 bankruptcy in 2002, well before the 2005 bankruptcy law kicked in making it harder for people to discharge debts. Palladino, who ran his own business as a general contractor, was injured when a power tool mangled his hand. Several surgeries and months of recuperation saved the hand, but his business went south, and he ended up maxing out his credit cards to pay for living expenses. "I didn't want to declare bankruptcy," he says, "but I really had no choice. There was a long period when just I wasn't making any money and was up to my neck in bills."The bankruptcy discharged Palladino's credit card balances and many of the debts that he'd run up trying to keep his struggling business afloat, though he still had to pay the IRS for taxes he'd been unable to pay during his illness. But his credit was in tatters and his prospects for rebuilding his contracting business looked bleak. "A contractor works on credit," he explains. "You need it to buy materials and pay workers and subcontractors it's hard to do that when no one is willing to let you borrow from them." Palladino's problem was one familiar to anyone who has declared bankruptcy. In a time when one's credit rating is almost a public validation and the gateway to coveted possessions like credit cards, car loans and mortgages a bankruptcy can be like a ghost haunting your credit history and depriving you of the financial means to improve your life.But even a bankruptcy the ultimate black mark on your credit isn't an insurmountable obstacle to financial recovery. With apologies to F. Scott Fitzgerald, there are second acts in American life, and most definitely in credit ratings.

Small Steps First:

Pay Every Bill On Time"You really don't have any leeway here," says Jim Shea, a Baltimore based CPA and financial planner. "You are trying to show that your prior financial missteps are firmly behind you and the best way to do that is to meet every obligation utility, cable, cell phone, rent bill, etc. on time." Not every utility or cable company reports late payments to credit reporting companies, Shea notes, but some do. So there's no reason to risk anything negative ending up on your credit report. Shea says that by paying your bills on time you demonstrate a renewed image of responsibility and trustworthiness. Letting bills slide, on the other hand, tells potential lenders that you aren't serious about financial responsibility or that you may still have financial problems you haven't addressed. "If you are trying to rebuild your credit, anything that makes you seem still unreliable works against you," Shea says. "And nothing works harder against you than repeated late payments on your credit report, especially in the wake of a bankruptcy."

1- Obtain a Secured Credit Card:

You might think that after a bankruptcy particularly one caused by credit debts it would be a good idea to avoid credit altogether. But that would be exactly wrong. In fact, to repair a damaged credit history, you need to replace it with a good credit history. Of course, lenders are naturally wary of extending credit to someone whose credit history suggests the possibility that they won't be repaid. In order to rebuild your credit, you may have to convince lenders that you can be trusted, and that may require handing over a deposit before credit will be granted. A secured credit card is a credit account whose limit is backed up by a deposit. That is, you deposit, say $500, at your bank and they provide you with a credit card with a spending limit of $500. In almost all other respects, a secured credit card functions like a normal, unsecured credit card; you can make charges on the card up to the maximum spending limit (usually the amount of the deposit) and you repay the balance, which is subject to interest charges, with periodic (usually monthly) payments. The deposit protects the bank in the event you cannot repay the money charged on the card. In many cases, a secured credit card may be the only line of credit obtainable in the wake of bankruptcy, but if used wisely keeping spending in check and making payments on the card's balance on time it can help generate a new track record of financial responsibility. 2- Why it is good: Secured credit cards are good way of creating a new, post bankruptcy history of good creditworthiness, says Gerri Detweiler, author of The Ultimate Credit Handbook, but they often come with strings. "Even though the line of credit is secured by a deposit, you're still a bad risk in the eyes of the bank, and so secured cards usually come with higher interest rates," she explains. "So you have to be careful about not incurring penalties like late payments, because the fees and interest payments can eat up a portion of the available credit." Detweiler advises shopping around to get the lowest fees and rates on secured cards. It's also important to make certain that the bank reports the secured credit card's usage to the major credit reporting bureaus. "Using the card is useless if it doesn't reflect positively on your credit score," she says. Since not every bank reports secured card usage, it's worth asking. A secured line of credit can be a major step on your path back to creditworthiness. "Generally, people who have a secured credit card say that within seven or eight months they start receiving new offers for unsecured credit cards," Detweiler says.

to be continuing in part 2

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