As you went through the bankruptcy process, you might have been apprehensive about your post-bankruptcy financial life. With bankruptcy filings that stay on your credit report for 7-10 years, fear is only natural. However, if you manage it correctly, this time can truly serve as a fresh start where you build a foundation for your future financial success.
To make that a reality, a few important things need to happen. Fortunately, these things follow a logical progression, and you can focus on them individually as you make your way.
Establishing Your Emergency Fund
The very first thing you need to do after filing for bankruptcy is to develop an emergency fund. That's because your credit score probably took a major hit when you filed--and it might not have been all that strong to begin with. As a result, credit will be either costly or impossible to obtain.
If your filing was a Chapter 13 filing, your salary is adjusted to pay off remaining debts. That leaves you with very little money to contribute to an emergency fund. You will have to adhere to a tight budget and consider selling off any remaining assets or belongings to create your financial safety net.
On the other hand, if you filed for Chapter 7, you'll have access to your entire salary. You'll still want a strict budget for the first few years--consider stashing 20% of your salary every pay period to your emergency fund. This might seem excessive, but the reality is that you'll want to avoid credit for the time being. You'll have to have cash for major purchases.
Some cost-cutting measures include:
- Using public transit instead of a car
- Cutting phone and television subscriptions
- Shifting entertainment interests to inexpensive or free pursuits
Creating Your Long-Term Budget
Once your emergency fund is properly established, it's time to begin looking at your long-term budget. You aren't in a position where you have to contribute significant amounts of money to your savings any longer. That said, you'll still need to develop a monthly cash surplus--particularly during this time when credit is still problematic.
Take a hard look at the sacrifices you've made to get to this point. If there are any life-improving things that need to be reintroduced to your life, this is a good time to do so. When all's said and done, your goal is to be able to comfortably save 10% of your salary (or your altered income in a Chapter 13 reorganization) to replenish your emergency fund or add to retirement investments.
At this point, you should have a healthy savings and a sustainable budget. The road to this point was probably difficult and could have lasted several years. Your financial foundation is well-built as a result of your efforts, though. Now, your final task is to begin rebuilding your credit profile.
For Chapter 7 cases, this is often fairly straightforward. The higher monthly income in a Chapter 7 allows for access to low lines of retail credit such as gasoline and retail credit cards. Paying these off monthly, combined with rent/mortgage and utility payments, is often enough to do the trick.
For Chapter 13 clients, the reduced monthly income creates an obstacle to obtaining useful credit. The best bet is to add a few monthly payments, such as utilities and phone costs, back into your monthly budget. Also, if you have equity in a home, you can often refinance out of Chapter 13--but you'll want to wait until your credit score rebound to around 650 to do so.
Your life post-bankruptcy won't be easy. The important thing is to take things one step at a time, talk with a bankruptcy attorney, and remember--the changes you're forced to make to your financial life now will give you the best possible chance for success in the future.