How To Recover Your Finances After Bankruptcy? 

Try to say bankruptcy out loud and you will instantly start feeling anxious as if you’ve lost all your belongings. 

The reality is that thousands of people in the U.S. have no other choice but to file for it. Did you know the total bankruptcy filings have grown up to 16% since last year which shows that a bad time could hit your finances at any moment? 

But bankruptcy is more of a fresh start rather than the end of your finances and credit score. Life after bankruptcy is the perfect moment to pick the pieces up and build your finances slowly and gradually. This guide will help you in your path to recovery and give some very useful tips on how to set up your finances back from scratch again. 

How Does Bankruptcy Affect You? 

Filing for bankruptcy is not a decision you make at the whim but is actually fueled by the overwhelming stress of finances.

Immediate Effects on Your Finances

The first and instant effect happens when a stay is placed automatically and it stops all debt collectors from taking any action against you. You can take a welcome breather knowing that your creditors won’t pursue you for payments now.  You might loose some of your assets like property or cars as well when you file for a bankruptcy. 

How is Your Credit Affected by This? 

Your next step will be to rebuild credit post-bankruptcy because did you know it takes almost ten years for the filing to leave your credit report? Regular things like getting a loan approved or signing a rental agreement with someone will become a bit of a hassle because of a bankruptcy on your credit. Lenders usually see this as a big red flag and they just bump up the interest rate or deny your application altogether. 

Creating a Post-Bankruptcy Budget

Being prepared after filing for bankruptcy will make a big difference in how you deal with your finances while keeping yourself away from the debt again. This is the one of the most important bankruptcy recovery steps which will start your journey back to normal again. 

Look At Your Current Financial Situation

Gather all your important documents like statements, bills and income records and list down all your income sources like side jobs or government assistance. Write down all the big and small expenses like your rent or insurance that will be a constant every month. Don’t forget to add up the extra spending you do here and there like going out for dinner. 

Your Financial Goals Should be Realistic 

These goals will help you keep track of spending and know where to hold back. 

Track Your Expenses

Is the budget set? Are the goals decided? Now it’s time to track your expenses very diligently. And we mean, really diligently. Try to use budgeting apps or take some out to make a spreadsheet where you can log all your expenses and even spot areas where you can improve. 

Take a look at your budget from time to time, either monthly or quarterly so you know how close you are to your financial goals. 

Rebuilding Your Credit Score

On your road to financial recovery after bankruptcy, this is the most important step which will need your patience, consistency and a little bit of strategy. 

Get a Secured Credit Card

This time, a secured credit card is the way to go. One of the reasons why we recommend a secured one over a traditional one is that the former takes a cash deposit upfront from you. This deposit is kind of a collateral and it’s the same amount as your credit limit. You know the beauty of this card is that it gives you a chance to prove to lenders that you can handle credit in a responsible way and that they are not taking a risk. Always remember that it takes quite some time to slowly rebuild credit post-bankruptcy so don’t try to rush too much into things. 

Make small purchases and pay off the full balance every month because this shows that you’re using it wisely. 

Pay on Time 

There’s one rule you should be sticking to when building up your credit and it’s to always pay on time. Stay on top of your phone bills or gas and electricity payments so your credit score doesn’t take a hit. Missing or paying these payments late will put your progress off-track and you will be back to square one. 

Here’s one of the most useful bankruptcy recovery steps: set up an automatic payment system or calendar reminder so you never miss a payment, even if you forget it. It’s one of these small habits that show lenders how in control you are of your finances. 

Keep an Eye on Your Credit Report

Building your credit back after bankruptcy is a slow and steady thing but it’s definitely not a set-it-and-forget-it type of plan. You have to keep monitoring your credit report so you can catch and correct any errors that can keep your score from growing. 

Disputing Errors

You will find human errors everywhere and your credit report is no exception either. These errors could be as small as a wrong balance or as major as a debt being completely wiped clean. Review your report from time to time and if you find any error, then quickly dispute it with the credit bureaus. 

What’s Credit Utilization?

What do you think is the biggest reason why you end up maxing out all your credit cards and have no choice but to file for bankruptcy? It’s because you just don’t know how to manage your credit in a proper way so you don’t end up with anything at a crucial time and this is where credit utilization can help you. So let’s say you have a secured card with a limit of $1000. Try to keep your balance of at least $300 because you don’t want the lenders to see that you’ve maxed out the credit card completely. 

Keep a Fund for Rainy Days 

A tough situation never calls before arriving but your finances should always be ready to deal with it. 

Why Do You Need an Emergency Fund?

Your life will rarely follow the plans you’ve made for the future and all you can do is be prepared. It could be your car breaking down or a sudden visit to the doctor that will throw a wrench in all your financial planning. 

An emergency fund has some extra cash as a reserve so you can use it instead of stressing about the money or maxing out your credit card. 

How much should you have in a fund like this? Try to save expenses for six to three months atleast. This might sound like a big challenge right now as you’re recovering from bankruptcy but start small and work your way up. 

Strategies for Saving

Setting up enough money in your emergency funds is not as simple as writing a check. 

Automatic Transfers

Just set up an automatic transfer that will send a certain amount from your checking account to a savings account every time you get paid. Oh and this is very important—you have to treat this like any other expense that’s a non-negotiable. Even small amounts like $20 or $50 a paycheck add up quicker than you think. 

Cutting Back on Extra Expenses

A little coffee there and a small shopping spree here and you end up with little expenses that start to add up in the end. These are the areas where you need to make small cutbacks and you will see a bigger impact as well. Look at your monthly spending and it’ll tell you places where you can tighten the belt a little. Put that money in your emergency fund instead so you have some room to breathe in case of a hard time with your finances. We’re not saying that you have to give up everything you enjoy but these are small changes which go a long way to help make a safety net. 

Let the Professionals Help Your Finances 

Bankruptcy is nothing short of a stressful time in your life but you don’t have to go through it alone. 

Why is Credit Counseling Important? 

Going through bankruptcy means having the biggest hit on your credit. But credit counseling is a very useful way to manage your debt and expenses together so you don’t fall into the same trap again. You will get plenty of practical advice to get you back on track and have your finances up and running soon. 

Working with a Financial Advisor

Here are some things they will cover for you: 

They Will Make a Custom Financial Plan 

The advisor will take a look at your situation and assess it to come up with a plan on how to deal with the finances. They will set up your expenses and debt payments after looking at your income. 

They Will Provide Strategies for Investment 

The last thing on your mind after filing for bankruptcy will be to invest in something. But investing is a big help in getting your wealth back and finances in order. An advisor will give you strategies to invest in places that don’t have a high risk so you don’t end up losing money again. 

Avoiding Future Debt

You can’t learn from anything as much as you pick up from your past mistakes and that’s why you need to stay away from any debts after bankruptcy. Read to learn post-bankruptcy financial tips that will teach you where you went wrong before. 

Learn from Past Mistakes

What was it that took you to the point of bankruptcy? Figure this out so you don’t repeat history again. This could be overspending on things out of your budget or using your credit cards more than you can repay. 

Developing Healthy Financial Habits

Living Within Your Means

There’s no hiding the fact that your expenses will automatically grow with your income. But you have to spend less than you earn even as your income starts to increase. Make this a habit so you always have some extra room in your budget for savings or an emergency. 

Avoiding High-Interest Loans

A high-interest loan is a trap sweet as honey and seems like a quick fix when you’re in a tough spot, but it will lead to a cycle that’s almost impossible to escape. If you need to borrow money then look for low-interest options and only borrow the amount you know you can return on time. 

Final Thoughts 

Recap of Key Steps

Finding your footing after practically losing all your finances is a tough journey but step by step is the way to go. Make a plan to rebuild your finances from scratch after bankruptcy but take smarter approaches this time. Set both short-term and long-term goals and put all your focus on improving your credit score. 

What to Do for the Future

No one knows a challenging time more than someone who has been through bankruptcy but it doesn’t define your life forever. You have the power to rewrite your story with one smart decision at a time. Follow all the important post-bankruptcy financial tips we taught in this guide and stay away from the traps that got you in this position in the first place.