Tips for Recovering from a Personal Bankruptcy
There are a lot of ways to address personal debt, including filing for bankruptcy. Going through the process of filing for bankruptcy can be costly and time-consuming, but it may be the best option, especially if your debts are simply too big or your income is too restricted.
One of the major drawbacks of filing bankruptcy is the lasting damage to your credit, and it's true that getting back to "normal" following a bankruptcy can take some time, but it's not impossible, especially if you follow these steps.
Complete your bankruptcy
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13. How debts are ultimately discharged in either type of bankruptcy will be quite different, so it's important that you understand what's required and follow through.
Completing any types of bankruptcy will likely require some paperwork, fees, counseling and education courses, and possible monthly payments. Failure to fulfill any requirement may result in your bankruptcy being canceled, so the last thing you want to do is fail to follow every step as required.
Check your credit report
After you file for bankruptcy, any of the loans or lines of credit that have been discharged should have a zero balance on your credit report. Errors do happen, though, and you should never assume things will always go the way they should.
After you've completed your bankruptcy, you should request copies of each of your credit reports to ensure that the accounts are all reflected appropriately. If any of your accounts do show a balance and shouldn’t, you can dispute the error. You may also want to contact your creditors directly to check on your account status.
You'll also likely see that your bankruptcy is now listed on your credit report. Unfortunately, the fact that you filed for bankruptcy will have a negative impact on your credit score for seven to ten years (depending on the types of bankruptcy you filed). The good news is that negative impact will lessen quickly over time.
Create a post-bankruptcy budget
Once your bankruptcy is finalized, life goes on. Luckily, your debts shouldn't be weighing you down so drastically anymore, but that doesn't mean that you're out of the woods. You'll want to thoroughly assess your finances and plan your new budget accordingly.
Do you have a bankruptcy payment plan? You'll need to plan for that. But perhaps more importantly, having gone through one financial crisis, this is a good opportunity to tighten up your spending and hopefully prevent future financial challenges.
With all budgets, it's a good idea to start by understanding what you're spending now. You can then separate those expenses into necessities and non-necessities. From there, you can order those expenses by priority. What's most important to you? What are your goals and your values? Understanding those can make it easier to make hard choices when money is tight.
Focus on building a savings fund
Some debt is unavoidable. Losing your job or being stuck with a massive hospital bill are things most of us just can't prepare for. But there's a lot we can do to make sure that small setbacks don't become major challenges.
The first thing you'll want to do is start building a savings fund. The bigger the better, but obviously it has to fit within your abilities. The ideal is to have enough saved that you can cover six months' worth of expenses. That's a tall order for most families, so it's okay to start small. Any amount in savings is better than nothing in savings. Having money available can help save you from turning to credit, which makes you less likely to fall back into debt.
Begin rebuilding your credit
Many, many people come out of debt swearing to never use credit ever again, but that's not typically a good idea. It's pretty rare that anyone can make due only ever paying in cash, and ultimately credit isn't the problem: it's spending money you can't afford to pay back.
So it's important that you reestablish your credit as soon as you're able. Good credit helps you access affordable credit products. And even if you don't want to ever use credit again, should you face a future emergency you'll have way more options if your credit is good to excellent.
One way to start building your credit is a with a secured credit card. It's low risk for lenders, which makes it accessible even if your credit has been badly damaged, plus using it will help rebuild your credit over time.
Consistently using credit wisely (using it for routine purchases and paying the balance before any interest is charged) is the best way to show that you're creditworthy and build you score in the process.
Monitor your spending and credit history
Bankruptcy is wake up call for a lot of consumers. It's a stressful process, but a valuable opportunity to reset without the crushing weight of too much debt.
That clean slate can be a double-edged sword, however, if you're not careful. If you fall back into the patterns that caused your financial problems in the first place, for instance, than your bankruptcy isn't much more than a temporary reprieve.
To make the most of that clean slate, stay vigilant. After you create your budget, stick with it. Don't get complacent. Watch your spending and make sure it matches your budget. Pull your credit report regularly and make sure everything looks good. Check your credit score and make sure it's moving in the right direction.
You don't need to make personal finance the center of your world, but it's something you should think about regularly. With a little routine maintenance, you can put yourself in the best possible position to avoid future setbacks.
Looking for an alternative to bankruptcy? A debt management plan from MMI is a great way to repay debt with reduced interest rates and a manageable monthly payment. Plus it's not a loan, so there's no credit requirement. Begin your free online analysis and see if a debt management plan is right for you.
