Interest rates are not something you might worry about when you are in a severe financial crisis. If you find yourself unable to pay the minimum payments on your credit card statements due to a lost job or a medical emergency, your focus is on solving the crisis.
You may file for bankruptcy to eliminate crushing debt. Credit card debt is responsible for a growing number of bankruptcy filings today. Higher interest rates and lower spending limits caused a crisis for many consumers who were already faced with money problems due the economic downturn.
Credit is unsecured debt. You can file Chapter 7 bankruptcy and eliminate that debt totally if you are unable to pay and will not lose the items you purchased with the credit cards.
For some consumers, eliminating unsecured debt through bankruptcy allows them to keep their home, furniture, car and other loans that were made using property as security.
Life after Bankruptcy
When the process is completed and your debts have been dismissed by the court, you may feel more in control of your finances.
A bankruptcy remains on your credit file for ten years. This is public information and your attorney would have discussed it with you.
Even so, you may be shocked to learn how difficult it is to rebuild your credit and how high your interest rates will be. After bankruptcy, you will not be able to qualify for a standard credit card offer or to obtain a loan.
You will pay more for insurance, may be required to place high cash deposits to have utilities turned on if you move to a different home or apartment. You may be turned down if you apply to rent a house and will be denied if you apply for a new car loan.
High Risk and Sub-Prime
Bankruptcy places a huge black mark on your credit report. Some financial experts claim it should be easy to get loans and credit cards after bankruptcy because lenders know you cannot have debts cancelled again for at least eight years.
That is the time period you must wait before filing for bankruptcy again. The problem is in the real world lenders don’t agree with experts on that theory. The lender views you as someone who successfully avoided paying his debts.
Therefore you are in a high risk lending category. After bankruptcy, your interest rates may be quite high but paying those high rates can help you regain a credit score that will allow you to qualify for lower rates.
The Sub-Prime Market
We’ve heard of sub-prime mortgages but there are sub-prime lenders as well in the credit card marketplace. To obtain any credit card after bankruptcy can be difficult.
In today’s economy, bankruptcies have been rising steadily for the past three or four years and include many people who were diligent in the past about paying their debts. For them, bankruptcy was the only option available.
Sub-prime lenders now offer credit cards for this consumer group. The credit accounts are not optimal. APR and fees are the highest allowed by law and spending limits are usually very low initially.
Most of the credit card offers are for secured credit accounts. This means you must put an amount of cash into an account in order to obtain the credit card.
The lender earns a profit by charging a rather high rate of interest and through fees such as annual fees, late fees, and transaction fees.
After bankruptcy, you should expect higher interest rates until you can re-establish yourself as a good credit risk. This is the reality of re-establishing yourself financially after filing for bankruptcy.
If you find yourself with a credit file damaged by bankruptcy, you must start at the beginning and choose lenders willing to grant you loans or credit.
You will need to accept any rates they offer but should keep in mind your goal is to rebuild credit rather than to have money for shopping