Rebuilding Your Finances After A Bankruptcy
/Being declared bankrupt can be stressful. But the good news is, when it is over you can rebuild your finances from a more solid foundation. It won’t be a fast or easy process, but you can do it.
Rebuilding your finances after bankruptcy takes time and discipline. If you open new credit accounts, you will need to pay your bills on time every month to demonstrate that you can manage your finances responsibly.
In this article, you will learn how you can have a fresh start for rebuilding your finances after bankruptcy.
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Create a new budget or rewrite your existing budget
The first step to building your finances after a bankruptcy is to create a realistic budget and stick to it. If you established a budget in the past, you may be wondering what went wrong. If you do not understand why your budget failed, you may repeat the same mistakes again.
When it comes to budgets, I generally advise against them. They feel restrictive, similar to diets. When you think about having a healthy relationship with food, it is about a lifestyle change as opposed to the quick fix that a diet presents. These quick fixes are not sustainable and often times create more harm. However, if someone is in precarious health, extreme changes need to be made in their diet. This is not a quick fix, but a necessary adjustment. The same can be applied in this case. This is why I am, in this case, an advocate for budgets.
To rebuild your finances after bankruptcy, you need to look at your spending habits to figure out what you can cut. You need to spend less than what you earn and set aside some money into a savings account. Make sure to create a line item in your budget for savings and treat it as an expense. If you still find it hard to save money or live within means after a bankruptcy, you really need to make some lifestyle changes which likely include finding a way to increase your income.
It is important to review your budget on a regular basis to make sure it is working. If your income goes up or down, financial goals change, or an emergency arises, then make adjustments because all these things will impact your budget. Therefore, your budget should be re-evaluated and adjusted as needed.
Build up your savings account
You should save for unexpected expenses first, especially after a bankruptcy, before anything else. Try to save at least three months’ worth of living expenses in a savings account before you start saving for retirement or other financial goals.
After a bankruptcy, with no debts to pay, you can save money to build up a freedom fund quickly. Since you have established a budget and allocated a certain amount in a "savings" expense category, it will be easier to stash away a certain amount of money every month.
By having a well-stocked freedom fund, you will be in a better position to manage your money after a bankruptcy. It will protect you from having to run up debt on your credit cards in the event of an unexpected expense.
Build up your financial profiles
Once you have established a budget and saved at least a month's worth of living expenses in your savings account, you can start opening a few credit accounts to start rebuilding your credit and restore and raise your credit score. Here are a few options that can help rebuild your credit after a bankruptcy, depending on your situation:
Apply for a credit-builder credit card
If you want to rebuild your credit, then a good option is to get a credit-builder credit card. Typically, this type of credit card comes with a low credit limit and high-interest rate.
If you get a credit-builder credit card, use it to pay for planned purchases and pay off the bill each month. to demonstrate to the card issuer that you are a responsible customer. Making your monthly payments always on time will raise your credit score over time.
2. Get a secured credit card
If you do not want to apply for a credit-builder credit card, you could consider applying for a secured credit card to start rebuilding your credit. To get a secured credit card, you will make a deposit that typically becomes your credit limit.
For example, if you put $500 in the account, your credit limit will be $500 on the secured credit card.
If you use your secured credit card responsibly for several months, your credit score will go up and you may be eligible for a traditional, unsecured credit card.
3. Apply for a credit builder loan
Getting a credit builder loan is one of the best ways to rebuild your credit history and boost your credit scores. Lenders usually do not offer more than $1,000 to customers who want to rebuild their credit after a bankruptcy.
Once you are approved for a credit builder loan, the money borrowed is deposited into an interest-bearing account with that lender. You will not be able to use that money in your account until your debt is paid back. Once the loan has been repaid, you receive the money.
If you always make on-time, regular payments it will be reported to the credit rating bureaus and as a result, your credit score will go up. But if you miss payments, it will also be reported. Missed or late payments will lower your credit score.
4. Become an authorized user
You can become an authorized user on someone else's credit card to rebuild your credit and help increase your credit scores. But keep in mind that any positive or negative reports on the primary card holder's credit account will appear on your credit profile too.
If the primary cardholder has any late or missed payment history, then their negative actions will appear on your credit history too. and as a result, negatively impact your credit-building effort. So make sure to become an authorized user on a credit card of someone else who has a long history of always making on-time, regular payments.
Check your credit reports
If your credit reports contain inaccuracies regarding your financial accounts, your credit score can be lowered. Your potential lenders will look at your credit history to determine if you are creditworthy. Having inaccurate information on your credit file will affect your ability to borrow money or get a lower interest rate if you are offered any credit.
So make sure to check your credit report for errors. Each of the three major credit reporting agencies offers consumers a free credit report annually.
If you find any untrue negative items on any of your credit reports, contact the credit reporting agency to remove it from that credit report. When an error is corrected and removed from your credit files, your score will rise.
Start investing
Once you have saved at least a month's worth of living expenses in your freedom fund, it indicates that your budget is working for you. You can now start setting aside some money into an investment account if you want to start investing.
But if you are worried about a job loss or pay cut due to a recession or unforeseen circumstances, you should put aside at least three to six months' worth of living expenses in your freedom fund to prepare yourself for the worst-case scenario before you start investing.
If your employer offers a 401(k) or other retirement savings account, participate in it. Especially, if your employer offers matching contributions to a retirement savings plan, take advantage of it, as it is a free raise.
If your employer does not offer any retirement savings plan, you could open your own individual retirement account (IRA) with a reputable company. An IRA gives you complete control over the investment choices.
Purchasing a home or car after bankruptcy
You can qualify for an FHA-insured mortgage as soon as one year after your bankruptcy discharge. However, be prepared to pay higher interest rates, as lenders will still consider you as a high-risk borrower. But shop around for the best rate and terms.
Just because you have a bankruptcy on your credit file, it does not mean you cannot negotiate for a better mortgage loan. Also, consider paying more for a down payment if you can, as it can help you negotiate for a lower interest rate and lender fees.
When it comes to getting an automobile loan to buy a car, your interest rate will be very high. That being said, you should still shop around for the best rate and terms. Some lenders may offer you a better rate. If you cannot afford to make the payments on time, consider purchasing a used car with cash if you can.
In conclusion
As you have seen, you can put your finances back in order after a bankruptcy. Once the bankruptcy is behind you, you never, ever want to be in that financial turmoil again. If you follow the above steps for rebuilding your finances after a bankruptcy, you will reach your financial goals sooner than later.
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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
