Bankruptcy is a life-changing event, but it doesn’t have to be life-ending. Use the New Year to help propel you into a new financial life with some of these tips to recover from your bankruptcy experience.
1. Find Your Motivation Again
About 1 in 8 American adults has contemplated declaring bankruptcy, so you are not alone in your struggles. Failure is a common feeling among those who have filed for bankruptcy. But, there is life after bankruptcy, and 2014 is the year to find that life.
Take your experience from the last year, and use it as a learning opportunity. Reflect on why you were forced to or why you chose to declare bankruptcy, and start from there. Can you (and will you) do anything different now that will prevent those problems from arising again? Why do you want to avoid this situation in the future?
Whether it is for the sake of your mental health, self-esteem and confidence, your children, or your spouse, use this motivation to keep you on track. Share your plans for change with your family or close friends so they can help to keep you accountable. Educate your children about financial security so that they never have to endure what you have had to live through.
2. Rebuild Savings
While it may seem more intuitive to use all your income to pay bills on time, it is vitally important to rebuild your savings fund. If disaster or an emergency strikes, no one will care if you’ve been paying bills—they’ll care about whether or not you have an emergency savings fund.
Designate a specific amount or percentage of your paycheck to be deposited into a savings account every payday. Even a modest 5% will get you started in the right direction. Try to get at least $500 in savings as soon as possible, even if that means a few extra deposits into the savings account this month.
3. Prioritize and Pay
I know, I just spouted off about how saving is more important than spending—but paying your bills on time is pretty important, too. Paying your bills (like the mortgage and utilities) on time will actually help you rebuild your credit, which you desperately need after bankruptcy. One late payment on your mortgage could potentially set you back 6 months to a year in credit score recovery.
Just like with your savings, get your bill-pay on auto-pilot so you don’t even have to think about it. If you are concerned about having enough funds to pay every bill every month, prioritize the more important (they’re all important) bills to be paid in full first, then divvy money out from there.
4. Set a Realistic Budget
Most bankruptcy victims have a negative budget, meaning they spend more every month than they have coming in. The New Year is the perfect time to set a more realistic and sustainable budget. Stop trying to keep up with the Joneses, and start living your own, financially secure life.
Take out an old-fashioned pen and paper, and write down your monthly necessities. Here’s a hint—they will definitely include rent/mortgage, food, and utilities. Depending on your family, you might have a few other categories for your children. Almost everything else is negotiable.
You don’t really need that weekly Chinese take-out, and while there might be a lot of complaints, the cable might get the boot, too. You need to make active decisions to recover from bankruptcy, and your budget is the perfect place to execute those choices.
One way to stick to a set budget is by only using cash. Each week, estimate your expenses based on your monthly budget. Withdraw only that amount in cash at the beginning of the week. Once the money runs out, you are done spending until the next week. It’s a pretty cut-and-dry system, and it works.
5. Cautiously Open Credit
Like previously mentioned, you need to start working on your credit score. While bankruptcy isn’t the complete credit nightmare that people usually believe, it certainly isn’t a walk in the park. Start the recovery process by throwing away every credit card application you get in the mail over the next few months—companies will prey on you by offering cards with big rates and high application fees.
Instead, try applying for a secured card at an established bank that reports to one of the big three credit reporting companies. A secured credit card requires you to deposit a certain amount of money into an account, and that money becomes your credit limit. In order to build credit with this card, make full and timely monthly payments and spend only about 10% of the credit limit.
6. Know Your Credit Report
It is now your personal responsibility to manage your credit score. Because of the impact of bankruptcy, there might be some incorrect information on your credit report that is keeping your score low. For example, debts might still be listed that were taken away by the bankruptcy declaration.
You have every right to request these claims to be erased, and you can request it yourself. Obtain free reports from all three big reporting companies, and scrutinize each report, comparing them and looking for any discrepancies. There is a limit for the number of credit reports you can get from each company per year, so research those and get your reports at the optimum time.
Remember, you are not alone in your situation, and you can bounce back from this. 2014 can be the best year yet, especially for your finances. These tips can help get you there.
Drew Kobb, in addition to studying civil law and finance, loves long distance running and considers himself a health and fitness enthusiast. His interests range all over the medical field, and Drew highlights that range on his blog, Dr. Ouch. He is passionate about financial health as well, from avoiding bankruptcy and debt with the help of firms like Abahkan & Associates, to creating family budgets.