Bankruptcy Is Disruptive

Bankruptcy is not something you can easily shrug off because it can severely compromise your financial future. This is why experts caution everyone to avoid it at all cost.

Before you file for bankruptcy, explore other options to settle your debts because once you’re declared a bankrupt, you will be left financially scarred – at least for a couple of years.

How your finances are compromised with bankruptcy

Job - You can bid farewell to a career in the financial sector. If this is where you work, you are expected to tell your employer that you filed a petition for bankruptcy.

If you are a lawyer or agent (real estate or insurance), you will not be allowed to practice. Once your bankruptcy is over, you can resume your practice.

However, if you were laid off by your employer or the firm you worked for, finding alternative employment may prove difficult and can therefore seriously compromise your monthly income.

Business opportunities - You will not be allowed to set up a business or be a director of any company. At least, this is true until the bankruptcy process is over.

Then again, just like a job search, it might be hard obtaining financing for a start-up business. You might also have a hard time finding a partner who can trust you with money.

After all, bankruptcy is usually an indication you are not good at handling money.

Assets - You will automatically lose any asset you worked hard to acquire before you went bankrupt. The asset/s will be liquidated and used to pay off the debts you owe.

If you own a house, you will lose it. The same is true for any vehicle you own. Since you stand to lose every asset you own because of the bankruptcy, you need to rebuild your asset base from scratch – at least, if you plan to attain a more stable financial future.

Credit report - According to TransUnion, a credit report holds your credit activity. It shows your behaviour as a credit borrower. If you have bad credit habits i.e. failure to pay your dues on time, this will be reflected on your credit history.

Lenders and creditors may very well hesitate to approve your loan or credit account due to this.

If they do approve your account, you will be slapped with a high-interest rate. This is the only way they can protect themselves from the possibility that you will not pay back your dues.

Rebuilding credit after bankruptcy - Improving your credit history is the best way to recover from the effects of bankruptcy and keep it from ruining your financial future.

TransUnion also reported that the taint of bankruptcy on your credit report will remain for the next eight years.

This means when you apply for a loan to accumulate assets e.g. mortgage, the lender will either reject your loan application or fix a high-interest rate for you. Neither option will be favourable to you.

This is why your first step should be to rebuild your credit after bankruptcy.

Here are some helpful tips:

• Continue to use credit. You cannot rebuild your credit history if you stop using credit. You need to keep borrowing money – but make sure you practice the right credit habits.
• Pay your dues on time. This has a great influence on your credit report. By doing this alone, you can give you credit score a huge boost. Of course, this is not the only thing that will help you.
• Keep your balance within 30% of your credit limit. If your limit is RM50,000, your balance should never go beyond RM15,000. This is how you maintain a good credit score. When you hit 30%, do not use credit until you have lowered your balance.
• Hold off closing credit accounts. If you can help it, do not close credit card accounts. If you are buried in debt, this might seem like a good idea to keep you from acquiring more. But this will not help your credit report. Keep the card hidden so you will not be tempted to use it – but do not close it.

In the end, practising the right credit behaviour will allow you to rebuild the financial future that bankruptcy compromised.

While it is devastating, being bankrupt is not the end of the world. There are people who have risen from the ashes of bankruptcy to be financially successful.

Use this event in your life to help you make the right decisions from hereon. Sometimes, the best lessons come from the gravest of mistakes.

When you’ve hit the bottom, remember that there’s nowhere else to go but up.

This article first appeared in thenewsavvy.com