Sometimes bad things happen, in life and in your finances. A job loss or medical condition can lead to foreclosure, bankruptcy, divorce. These events delay prosperity.
Oftentimes the cause of the problem is beyond your control. But your actions after a crisis can determine how badly — and to some extent, for how long — your finances will be affected.
Follow these tips to bounce back as quickly as possible from three types of adversity.
Emerging from bankruptcy
Avoiding bankruptcy can be tough if your income doesn’t come close to covering your monthly obligations.
Before you get to the point of no return, pay attention to warning signs that you’re heading in that direction. The writing may be on the wall “if you’re borrowing money constantly from family in order to pay your bills or if you’re getting notices of garnishments on the job,” says Kevin Chern, president of Total Attorneys in Chicago.
“Only by doing a detailed analysis of your debt-to-income ratio and your ability to impact a change in your expenses or income are you going to get an idea of whether you should consider bankruptcy,” he says.
Ironically, it may be easier after a bankruptcy to rebuild your credit than it would have been before you filed, Chern says.
With a clean slate, you have no outstanding debt and you can’t file another bankruptcy case for eight years. You may look like a better credit risk — maybe not a good risk, but a better one.
Rebuilding your credit will be vital to your economic recovery.
“If you do take steps to be responsible after filing the bankruptcy, it’s not going to necessarily take 10 years for you to start rebuilding your credit,” says Chern. However, the bankruptcy will hang around on your credit report for that long.
Controlling your spending is the best way to begin rebuilding your finances. Turning off lights, eating at home, using public transportation or carpooling as much as possible are all small changes that can have a big impact on your finances overall.
“You have to know what you spend to identify where you’re overspending and use that to keep a budget, and then be committed to living within that budget. Plus, start a savings plan,” says Chern.
Chern says to rebuild credit, you should consider getting a secured credit card from your bank which allows you to charge purchases against your savings account. Creditors will more likely offer you a loan in the future if you demonstrate you can responsibly use credit.
Flourishing after foreclosure
Some 13.16 percent of mortgages are in foreclosure or at least one payment past due, according to the Mortgage Bankers Association’s National Delinquency Survey.
If the lender is amenable, taking a loan modification may be a lifesaver for homeowners drowning in debt. A loan modification will change the terms of the original loan.
Though it’s always been an option, the housing crisis made loan modification a common concept. Plus, the Obama administration’s Home Affordable Modification program, part of the Making Home Affordable plan, streamlined the process for lenders to modify loans, but did make the rules for homeowners somewhat complicated. The best place to start is by speaking with your lender to determine your options.
“If you are about to go into foreclosure, talk to your mortgage company as soon as you foresee an issue with them. Most companies have a loss mitigation department and they may be able to put the amount you are in arrears behind the mortgage and come up with a payment that you can pay at the time,” says Althea DeBarr-Johnson, an Atlanta-based attorney who focuses on wealth preservation for her clients.
Like other damaging information on your credit report, a foreclosure will show up for seven years, but its impact will lessen with time.
As with a bankruptcy, you can take steps to clean up your credit (see above).
First, though, anyone going through a foreclosure or similar event should address the emotional side of their situation.
“People who are in the midst of these things can only see the problem and they can’t see a solution. Because they’re just so invested in those feelings of failure, disappointment, shock, the first thing I would say is acknowledge that you are where you are,” says Michael Kay, Certified Financial Planner and president of Financial Focus in Livingston, N.J.
Todd R. Tresidder, founder of FinancialMentor.com, agrees.
“Get into offensive mode; stop wallowing in your misery. Yes, it’s a bad situation. Let it go and commit to moving forward from where you are and accept the setback,” he says.
Be honest with yourself about setting goals and work on implementing the changes in your life that you need to achieve them.
“Work with qualified advisers, Certified Financial Planners, CPAs or attorneys who are skilled and experienced in these areas,” says Kay.
Divorce can throw a big monkey wrench into your finances, not only as a result of legal costs, but also because now two families instead of one live off the same amount of income that they lived on as an intact family.
To avoid some of the costs, try to keep it civil. “Avoid unnecessary litigation, unnecessarily engaging lawyers. Come to resolution amongst yourselves as much as possible,” says Lisa Rosenberg Moore, a family law attorney in Cherry Hill, N.J.
Anyone going through a divorce should speak with a therapist — your lawyer is not an acceptable substitute.
“You’re being billed at an hourly rate, and every hour you sit on the phone with your lawyer starts to add up,” Rosenberg says.
She recommends that divorcing couples accept their situations as quickly as possible and reconcile themselves to the fact that no matter what, they’re not going to have the same lifestyle as before.
Deal with the emotional dissolution of your marriage before tackling the financial. Dismantling the legal entanglement with your former partner should be about your money and your children — not about hurt feelings.