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There is life after declaring personal bankruptcy, but it comes with some big costs

A person walks by the United States Bankruptcy Court for the Southern District of New York in Manhattan, New York City, U.S., August 24, 2020.
Andrew Kelly | Reuters

Ever-mounting consumer debt levels and historically high unemployment rates surpassing 10% in many states have left growing numbers of Americans unable to pay their bills and contemplating personal bankruptcy. Although bankruptcy can offer a fresh start for many debtors, it's important to be aware of certain constraints and limitations that may be faced for years after filing. Here are the most-common limitations debtors encounter in life after a bankruptcy proceeding: 

Renting an apartment   

Renting an apartment in the first couple of years post-bankruptcy can be especially challenging. Many large, professionally-managed apartment complexes won't rent to those with recent bankruptcy histories. (Or if they do, they'll often charge extra security deposit fees, or demand several months of rent upfront.) On average, it takes two to four years post-bankruptcy for renting to become easier. 

Renting may be easier from an individual owner or smaller apartment buildings, but be prepared either way to explain your bankruptcy, and to offer extra security deposit or rent upfront. Try to position yourself in an apartment you like prior to bankruptcy, and stay there for at least a couple of years. You'll be able to avoid the hassle of searching for a new place with a recent bankruptcy, plus, you'll be able to rebuild new credit. You can also enroll in a paid rent reporting service, such as RentTrack or RentReporters, which will report your on-time rental payments to the credit bureaus, helping you re-build credit more quickly. 

Getting a mortgage 

Your odds of getting a traditional mortgage improve typically three to four years after a bankruptcy, but you should still be prepared to encounter higher interest rates or make a larger down payment. FHA and VA mortgage loans are typically available two years after a Chapter 7 discharge, or one year after a Chapter 13 discharge. In either scenario, it'll be incumbent upon you to prove that you've improved your credit, are paying bills and managing debt on-time, and have sufficient income to manage your mortgage payments. 

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Applying for credit cards 

Though traditional credit cards may be out of reach for a few years, you can accelerate that process by applying for a secured credit card. A secured credit card requires a refundable safety deposit as your credit line, so if you deposit $500, you can receive a credit line in the same amount. After approximately 12-18 months of on-time payments to your secured card, you should start receiving offers for traditional cards. 

Starting a business 

Though there's nothing stopping you from starting a business after bankruptcy, loan financing may be very difficult to procure for a few years. Banks and online lenders are generally reluctant to lend to those with histories of bankruptcy. Some sub-prime lenders offer collateralized loans, which are secured using an asset you own (such as your car), but consider the risks these carry, as well as the high interest rates. 

You may be better advised to save your own start-up capital, pool funds or ask for help from friends and family, or seek a business partner with good credit who can procure a loan for the business. 

Finding a job 

Though many employers require background checks of prospective employees, a bankruptcy won't necessarily disqualify you from the role. The exception, of course, is if you're seeking a job in finance or accounting, or any role in which you manage money or financial information. Still, a bankruptcy can be viewed negatively even in other professions, so it's important to have a ready response for any questions. If your bankruptcy was caused by an event largely beyond your control — such as a Covid-19 layoff, divorce, or illness — employers are more likely to be forgiving.

Whatever the reasons for your bankruptcy, it's important to emphasize that the past is behind you, and demonstrate the steps you're taking to rebuild your credit and build a stronger future. And that sort of fresh start is precisely what bankruptcy promises.

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