How long does it take to recover from serious financial difficulty?
If you’re on the verge of a serious financial problem, you need to act quickly. Going bankrupt or having multiple defaults listed on your credit report can severely impact your future ability to take out a loan or open a new line of credit. Lenders will look at your financial past, see that you’ve been unable to handle your finances, and potentially refuse your application.
Examples of a major financial misstep include going bankrupt, failing to repay multiple debts over a number of months or clocking up a clearout. The first two of these will stay on your credit report for five years, but the latter will stay on it for seven years. Here’s how to avoid getting to the point of no return, and what to do if you do find yourself going through bankruptcy.
1. Follow these money rules to help avoid bankruptcy
You might already feel yourself sliding down the slope toward bankruptcy – this could either be in a business sense or a personal one. If your business is failing, you might be pouring money into it to try to bring it back to life (not advisable). Alternatively, you could have gone through a messy divorce and the bank is threatening to foreclose on your home.
Knowing how to avoid major financial trouble is key at times like this. The following money rules will help you to stay away from the red:
- Spend less than you earn. Simple but effective. If you’re constantly turning to your credit cards to top up your bill payments or to fund your purchases, you’re living beyond your means. Turn back the dial until you have a surplus each month.
- Don’t try to impress anyone with your money. As soon as you start spending lots to impress your friends or family, you’re being irresponsible with your money.
- Plan your spending. If you need a new item from the shops, plan where you’ll buy it before you go. Know how much it costs and don’t buy anything extra while you’re there – which can be a tough habit to break, but it’s vital to keeping control of your finances.
- Become a DIY guru. You don’t have to build your own tables and chairs, but stop outsourcing tasks to other people. Clean your own house, mow your own lawns, do your own gardening, paint your own ceilings and walls. You’ll save truckloads each month that you can use to keep yourself away from going bankrupt.
2. Know where you stand at all times
Do you know what’s on your credit report? If you don’t, your finances could be compromised. You might have debts on your credit report that you forgot about, and incorrect personal information listed so lenders can’t get in touch with you. That’s when a clearout can occur. This is when a lender has made efforts to get in touch with you about your debt but they’ve been unable to get through. A clearout will stay on your credit report for seven years.
A good rule is to check your credit report every three months. Always check your personal information, and carefully go through your repayment history to find any missed payments. Bankruptcy will also appear on your credit report, and it’s a serious matter, but it’s not the end of the world. You can get a digestible, detailed copy of your credit report here through Credit Simple.
Knowing how to recover from bankruptcy is vital if you want to get back on your feet. The first step is to accept your situation and don’t wallow in defeat. Life happens, and sometimes it’s difficult, but there’s always a way back. If you’ve made your best effort to avoid going bankrupt but it still happened, there’s nothing more you could’ve done. However, now you have the opportunity to learn from your mistakes, so start again and don’t fall into the same spiral that led you to the financial red zone in the first place.
It’s easy to become overwhelmed by your finances, but finding a path forward is a better use of energy.
3. Who can be affected by bankruptcy?
Anybody can be affected by bankruptcy. Even people on solid incomes can extend themselves too far or have a credit limit set too high on their cards so they overspend and then can never make the repayments.
“I was facing bankruptcy early in life after over-committing to investment properties,” said an anonymous source.
“I’d bought two houses, one with my partner, and then the relationship ended. I couldn’t find any tenants for the property I owned by myself, and we couldn’t sell the property we’d bought together. Mortgage repayments obviously didn’t stop, but I couldn’t afford to pay for two homes on my income without the help of tenants. I was about a week away from bankruptcy when a tenant came through for my rental and a buyer for our house. I was lucky to avoid it, but clearly I was investing beyond my means and it taught me some valuable lessons.”
Your current financial situation is a good indicator of what you can afford. Don’t go into an investment relying on someone else to pay for the repayments (like buying a rental and expecting it to be tenanted all the time). For more personal finance articles, check out our blog, or to get a copy of your current credit report, register with Credit Simple.