Recovering from a Financial Calamity: Personal Bankruptcy

Planning for your financial future is, in some ways, like dieting. A pattern of strict adherence to a diet, followed by a time of binging and crashing, is bad for your health overall. So, too, is rigorous adherence to a budget, followed by inexplicable splurges that put you behind the financial 8 ball.

Just like with your diet, financial plans are susceptible to going off the rails. But just like making overall health a lifelong pursuit pays long-term dividends, just about anything that threatens your financial health in the short term can be overcome through slow and steady progress. The worst thing you can do is dwell on past mistakes or circumstances; take it easy on yourself, and focus on what you can do today—and tomorrow—to right the ship.

Over a three-part series, we’ll look at some tips for recovering from some of the financial headwinds you may face over the course of your life. First up: a bankruptcy filing.

One note before we start: This isn’t a column about whether or not you should file for bankruptcy. That’s a complicated concept that you should undertake with the help of legal counsel if you’re in an overwhelming amount of personal debt. But if you’ve already filed for bankruptcy and understand the impact on your credit, you should also understand that it can be a fresh start for many dentists and an opportunity to regain control of your financial future. Recovery is not immediate; it will take time, diligence, and patients to build your credit rating back up and regain your financial freedom. But it can be done.

Hasten the Recovery Period

A personal bankruptcy can seem embarrassing for dentists, who are generally considered “highly compensated.” But the simple truth is that anyone can run into financial difficulty. Dentists in particular, because they often face substantial early-career debt, can find it harder and harder to catch up.

The first six months after you formally file for bankruptcy will be a bit of a dead zone, with your credit score bottoming out and the persistent sound of crickets if you seek new credit. If you’re like most who declare bankruptcy under Chapter 7, there is probably a period in which you’re paying for most things—if not everything—with cash. (Chapter 13 bankruptcies are different, in that you’re probably continuing to pay back a portion of your debts.)

If being cash-based is working out well, stick with it for as long as you can. Being cash-based often means feeling the pain of each purchase, which in turn can keep you from making impulse buys. While a bankruptcy will be on your credit report for years, any loans you’ve agreed to continue to pay, such as a mortgage or car loan, will work in your favor building a fresh credit history, so long as you keep up with those payments, of course. Lenders may be more willing to offer you credit for auto or home loans than will, say, credit card companies.

Being able to show strong, steady income, as most dentists will be able to do, will go a long way toward again making you attractive to lenders. Some credit companies may be more likely to extend you credit than others, but be wary of casting too many nets. Looking into new credit can signal to lenders that you’re a higher risk.

After the cricket zone, you’ll start to establish a track record of paying your bills on time that will be reflected in your score in as little as 6 months to a year. Monitor your progress by requesting your credit report and checking your rating each year. While a bankruptcy will stay on your credit report for the better part of a decade, each passing month in which you are current will strengthen your score.

Slow and steady wins the race, and sometimes the feeling of making progress is enough to keep you going. Time is now on your side, and every month of regular payments is another month added to your recovery.

In Part 2, we’ll look at how to respond to a dental malpractice situation.