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After bankruptcy, don't rely on credit card for security

Anyone in Washington, D.C. who has ever done it themselves knows that going through Chapter 13 bankruptcy can be difficult. Even before filing, debtors are required to attend credit counseling, where they review their spending history and scrutinize every expense. Everything considered "disposable income" is added to the repayment plan, which may last anywhere from 3 to 5 years.

Unlike Chapter 7 bankruptcy, Chapter 13 requires debtors to pay back a portion of their debts over a period of time, following a set schedule agreed upon in court. The repayment plan must cover priority, secured and unsecured debts.

With no disposable income to put into saving, someone working through a Chapter 13 repayment plan may want to apply for a credit card, if only to cover unforeseen costs, such as a car accident or burst water pipe.

Financial advisors, however, say that is a risky plan. Those who have filed bankruptcy and are following the court's payment plan will have to ask their trustee for permission to open a credit card account. The debtor would have to prove that the new line of credit would not interfere with future payments. With all disposable income going toward monthly debt payments, this may be a hard case to make.

However, there are other options to create a financial cushion. Cutting corners in small ways, even just a couple of dollars here and there, can really add up after a year. One expert has suggested:

  • Use a piggy bank. Emptying your purse or pockets at the end of the day and putting the change in a small saving receptacle is an easy way to save.
  • Use a lunch box. If you pack a lunch instead of eating at a restaurant just once a week, you could save $5 every week. That's $260 a year.
  • Keep saving. Once you've fulfilled your repayment promise, keep at it. Everyone should have enough savings to cover them for 6 to 12 months in case of an emergency.

Source: Fox Business, "Can You Apply for Credit After Chapter 13 Bankruptcy?" Kim McGrigg, Oct. 31, 2011

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