I opened my business in February 2001 with my wife. I applied for a loan through the Small Business Association and was approved for a guarantee. During the course of the business, I opened lines of credit with Fleet Bank and Capital One, as well as applied for an emergency loan through Elc Loans.
StarsDVD, LLC was the first all DVD rental store in Connecticut. Everything was going fine until I got divorced. The business suddenly went from a two-person job to a solo gig.
I was working about 80 hours a week and going to school full-time. I made some mistakes here and there, like forgetting to include my salary in the business plan. Money started shrinking from the bank account and the debt started piling up.
Despite filing for a Limited Liability Corporation, the debt was mostly under my name. Creditors often insisted on a waiver or personal guarantee to establish credit.
In 2003 I was faced with a decision to get another loan or close shop. The DVD market had changed in those two years and the future for the format did not look that promising. I chose to close the doors to StarsDVD, LLC. By that time I was almost a quarter-million dollars in debt and I was still a few years before my thirtieth birthday.
I had no choice; it was either a life of indentured servitude or a run through the bankruptcy courts. I got myself a lawyer and was whisked through the whole process rather painlessly. The funny thing is that lawyers want their money before they start the paperwork so I had to borrow that from friends and family to get the ball rolling.
Filing for bankruptcy was by far the smartest financial move I ever made. Credit card companies paint a grim picture of bankruptcy and the years of toiling it will take to get out of that mess. I’m not advocating bankruptcy; everyone shouldn’t use it. However, if you do file, you are now stuck with the monumental task of building credit from scratch.
Here are my five tips for surviving bankruptcy and building credit:
1) The first thing you need to do is ensure you have an active checking AND savings account. If you don’t have a debit card you should then apply for one immediately. Having a debit card will solve your immediate problems such as buying airline tickets or renting a car. True you have to have the money in your account but the MasterCard or Visa logo on the debit card can be a godsend in the future.
2) Second thing is to get a secured credit card with a Visa or MasterCard logo. You will find that you are getting credit card offers in the mail. Read these carefully because they are designed to take advantage of people with bad credit. You need to get a secured credit card. These cards will offer very little available credit after all the fees have been applied. You need to max out this card and then pay the minimum payment for a while. This establishes a new credit history.
3) Don’t ever miss a payment again. This is imperative as it takes two years for a missed payment to leave your credit statement. Beg and borrow for the money to make the minimum, don’t miss a payment. Missing a payment after filing bankruptcy essentially will reset your credit rating back to a new low. Don’t let this happen.
4) Monitor your credit on a monthly basis. TransUnion, Equifax, and Experian all have plans where you can get monthly reports on your credit. You can get one free report a year but trust me you want the monthly reports. When you get these reports you need to go over them with a fine-toothed comb. Anything that does not look correct needs to be disputed. These credit reporting sites have an online dispute form you can file. Remember you are on the ropes now and fighting for your credit life. Every little error counts.
5) Don’t get discouraged. This last step may seem cheesy but you will still have creditors calling you. It will be difficult knowing you can’t even walk into Target or Sears and get a $300 line of credit. There is a light at the end of the tunnel but it takes years to get there. Staying positive and looking at the big picture is super important.
Filing for bankruptcy is a life-changing event but there can be life after bankruptcy. The whole credit business is based on fear. These multi-billion dollar credit companies give credit out like candy and they specifically target younger audiences in school.
By the time you graduate you may have tens of thousands of dollars in student loans and several thousands of dollars in credit card bills. Then you have to get a car and a job to pay those bills.
Before you know it you have to work years and years to pay off the debt you incurred in school. It can become a never-ending circle of debt and repayment. This is how credit card companies get their money.
Use your credit wisely and always keep an eye on your credit reports.