Surviving life's big money blows

Bankruptcy

Typically, consumers file for Chapter 7 bankruptcy protection, which erases most unsecured debts, such as credit card charges and medical bills. A Chapter 7 bankruptcy can remain on your credit reports for 10 years from the date your case was filed.

A Chapter 13 bankruptcy, by contrast, is usually reported by the credit bureaus for only seven years from the filing date. But Chapter 13 cases require a repayment plan that can take five years to complete. (Once you've finished the repayment plan, your still-unpaid unsecured debt is typically erased).

While you're in a repayment plan, you're usually a tough sell to other lenders, who are likely to shun you until your case has been discharged.

That's why Chapter 7 bankruptcies are often touted as a better solution for consumers: Much, if not all, of their debt is erased, and they get a fresh start that allows them to begin rebuilding their credit right away.

In fact, before the credit crunch, consumers who filed under Chapter 7 could expect to be flooded with offers for high-rate credit cards even before their cases were discharged. Some could get mortgage loans within six months.

The crunch has pretty much done away with that easy credit, but bankruptcy still is not a permanent black mark. People who get their finances in order and take steps to boost their credit scores can get their credit back to near-prime levels within a few years.

My column "Bounce back fast after bankruptcy" outlines some important credit-building tips:

• Get your finances right, which means living within your means and building up an emergency fund.

• Scour your credit reports for errors, including accounts that were included in the bankruptcy but aren't listed that way on your reports.

• Pay your bills on time, all the time.

• Get and use a secured line of credit, paying off your balances in full and never using more than 30% of your available credit limit.

• Consider getting an installment loan.

For more on bankruptcy, check out MSN Money's bankruptcy guide.

Divorce

Foreclosure and bankruptcy can be expensive, but few setbacks destroy wealth quite like a divorce.

It's not just that all your assets are divided or that the same income has to support two households now instead of one.

There's something about divorce that sets you back even further than if you'd never been married.

In a recent 15-year study of 9,000 people, those who married and stayed married built up nearly twice the net worth of single folks. (I mentioned this study in a recent column, "Get real: Marriage is a business.")

But people who married and then divorced saw their net worths plunge far below that of single folks. The divorced folks' average net worth was 77% lower than that of single people, and the drop in wealth began four years before the divorce was final.

The divorced people in the study did begin to rebuild after the divorce, but their progress was slow. Ten years after divorce, their median net worth was $10,000, while the still-married couples built up a median net worth of $43,000 after 10 years.

Clearly, money you spend trying to avoid divorce -- for example, on counseling -- could be a good investment. If there's no hope, mediation and other efforts to minimize legal fees can help slow down the wealth burn rate. Other ideas:

• Bone up. Read "How to leave your husband" and "How to leave your wife" for the financial steps you should take before a divorce.

• Pay for good legal advice. Don't cheat yourself in your rush out the door. Although you want to avoid an expensive legal fight, knowing your rights can help you get the most equitable settlement.

• Separate your credit before the divorce is final. Read "Don't let your ex trash your credit" to understand why you don't want any joint credit obligations with your ex. It doesn't matter who is responsible for paying according to the divorce decree. If your name is on the debt, it affects your credit.

• Make wealth creation a priority. You may still be paying off your legal bills, and your living expenses may have soared. But you still need to be concerned about your future. Make every effort possible to live below your means, build up a savings cushion (read "Why you need $500 in the bank") and invest for retirement.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Aug. 28, 2008

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