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Filing for bankruptcy can feel like you’ve hit the financial equivalent of rock bottom. While it does wipe out your old debt, bankruptcy stays on your credit report for seven to 10 years, hurting your long-term chances of qualifying for a mortgage or other credit.
What does life after bankruptcy look like? There will be hardships you’ll have to endure — from cash flow management to establishing good credit and rebuilding your financial profile — but it’s possible to financially recover from bankruptcy and give yourself a fresh start.
1. Save all paperwork from your bankruptcy case
Though it may not seem like a critical step, save all paperwork from your bankruptcy case. You may be asked for copies of the bankruptcy files in the future, especially when applying for a mortgage, loan, or for other financial products.
“If a lender or debt collector contacts you in the future about any of the debt included in your bankruptcy filing, it’ll be helpful to have your paperwork on hand,” says debt attorney Leslie Tayne, founder of Tayne Law Group. “In addition, if a debt collector contacts you about a debt you thought was discharged in bankruptcy, you have on-hand proof.”
The paperwork you should keep includes:
- Bankruptcy petition and schedules
- Proof of income that was included with your petition
- Social Security proof of income included with petition
- Correspondence from bankruptcy court, your attorney and bankruptcy trustee
- Final bankruptcy discharge
2. Start saving money
After going through bankruptcy, the last thing you want is for history to repeat itself. To help ensure this does not happen, establish good financial habits including starting a savings account that you can access during financial emergencies.
“Knowing how to manage your money is an integral part of the rebuilding process,” says Tayne. “Prevention is the best medicine, and saving money creates healthy financial habits for your present and future.”
One of the most effective ways to save money is to make doing so a habit. You can accomplish this by setting up recurring, automatic transfers to a savings account.
“With every check or payment you receive, no matter the amount, deposit a certain percentage into a savings account of some type,” says Sean Fox, president of Freedom Debt Relief. You should aim to save about 10 percent or more per paycheck, but select an amount that will allow you to comfortably and consistently keep making savings deposits.
Some employers offer the ability to direct a certain percentage of your paycheck to a designated account that is separate from the account the majority of your pay is deposited into. In addition, some banks and credit unions also allow you to create recurring, automatic transfers from a checking account to a savings account.
3. Build a budget
While creating and living by a budget can sound intimidating or perhaps even restrictive, a budget is simply a spending plan and tool that when used wisely can help you achieve future financial goals. Establishing a budget can help provide insights into your habits and prevent your spending from getting out of control once again.
To get started with creating a budget you’ll first need to calculate how much you earn each month, which will guide how much money you can spend and save on a monthly basis. To determine your income, you should look at recurring, reliable sources of income.
After that you’ll want to:
- Track your spending for one to two months: This can help you determine how much to budget for various categories of spending.
- Identify your financial priorities: After tracking your spending for a month or two, you may find you are spending more in some categories than you would like to or you’re not allocating enough money for other categories that are important to you. As part of this step, you may want to cut back spending on unnecessary items to keep your budget in line with new goals.
- Create your budget: Now it’s time to itemize the things you need money for each month. This list should include all of your debts and recurring bills, such as utility bills, as well as grocery expenses, and even money for entertainment. You should also allocate money for savings each month.
One popular approach to building a budget involves following what’s known as the 50/30/20 budget rule. The rule advises allocating 50 percent of your income toward your needs, 30 percent toward what would be considered your wants and 20 percent of your monthly income is set aside for savings.
Budgeting apps can also be used to establish and maintain your spending plan, or you can use a spreadsheet, or even a piece of paper, says Fox.
3. Reestablish good credit
Reestablishing a solid credit score is another important part of your path to financial recovery after bankruptcy. There are several ways to try and do this, no matter which type of bankruptcy you filed.
- Pay bills on time: One of the best approaches to rebuilding credit is to diligently pay all your bills on time, as payment history accounts for 35 percent of your overall FICO credit score. Focus on making timely payments on any remaining debts you may have to show that you can be financially responsible.
- Open a secured credit card: If you don’t have any remaining loans or debts after filing for bankruptcy that can be used to show your ability to make on-time payments, you will likely need to obtain credit. One of the ways to get started is by opening a secured credit card. These types of credit cards are typically backed by a savings account in your name. The money in your savings account acts as collateral for the secured credit card and is generally used to establish the spending limit for the card. Consistently making on time payments on the secured card will help you to rebuild a positive credit profile. Once you’ve made on-time payments for an extended period of time, the credit issuer may upgrade you to a traditional credit card.
- Have utility bill payments reported: You can also try to have monthly expenses like utility bills, including electricity or even a phone bill, counted toward your credit history. You’ll need to check with utility companies to find out whether they participate in any services that report your on-time payments to credit bureaus. Another option is to use Experian Boost, a tool that allows customers to include certain utility and phone bills in their Experian credit reports to help increase their credit score.
- Credit builder loans: These types of loans involve depositing money into an account. The lender will keep that money while you pay down the principal and interest of the loan. The payments you’re making are reported to credit agencies.
A Chapter 7 bankruptcy will generally remain on your credit report for 10 years. You can use that time to rebuild credit, including opening a secured credit card, consistently making on-time payments for utility bills, and using Experian Boost to ensure those payments are being reported to credit agencies.
As part of filing Chapter 13 bankruptcy, your debt is restructured to be more manageable for you, and you use part of your income to repay some debts for three to five years.
At the end of the repayment period, most remaining debt is discharged, and you are no longer responsible for continued repayment. However, the bankruptcy stays on your credit report for seven years and can lower your score by as much as 200 points.
4. Regularly monitor your credit reports
The idea of looking at your credit report after filing bankruptcy can be intimidating or anxiety-inducing. Still, you will want to make a regular habit of doing so for a variety of reasons. It’s important to monitor reports diligently and consistently to ensure all information on your profile is accurate. Incorrect information can cause your score to be lower than it should be.
“If the discharged debt isn’t showing up accurately on credit reports, it could count against you as a form of outstanding debt,” says Tayne.
Making matters worse, the debt could erroneously be transferred to a new debt collection agency which could be a challenge to resolve.
If you see an error on your credit report, you must contact the credit bureaus and the business that reported inaccurate information. Explain the situation in writing, including the credit bureaus’ dispute form and copies of documents supporting your claim. Keep records of everything you send.
Once the credit bureaus receive your dispute, they have 30 days to investigate.
All evidence will be forwarded to the business that reported the information. If the business determines that the information they reported is inaccurate, they are required to notify all three bureaus so that they can correct the information. The credit bureaus must give you the results in writing and, if the dispute results in a change, an additional free copy of your credit report.
It is easy to monitor your credit reports for free online. You can download a free copy of your report from each credit bureau once per year. You can also take advantage of free credit monitoring online tools such as Bankrate or set up fraud alerts through your banks.
5. Maintain your job and home
Maintaining your job and home is an essential part of life after bankruptcy and rebuilding your financial profile and reliability. You want to show lenders that you can pay back debts such as your mortgage and that you can maintain a reliable, steady stream of income through a job.
In addition, many lenders consider your employment history when reviewing applications.
Having a consistent income improves your chances of being approved for future loans. Job hopping or gaps in employment, on the other hand, can make you look like a risk.
6. Make an emergency fund
If you lose your job or face any sort of unexpected financial needs, having an emergency fund can help you avoid a disastrous outcome that lands you back in debt. You’ll want to get started on creating this type of savings account as soon as possible, even if you only have a limited amount of money to contribute regularly. The deposits will add up over time and making regular deposits, no matter how small, will help you establish the habit of saving.
There are a couple of common options when it comes to where to save your emergency fund:
- A savings account with a higher interest rate. Online banks are a good option because they typically offer higher yields than brick-and-mortar banks with quick and easy access to funds.
- A high yield savings account. Similar to a standard savings account, a high yield savings account pays a much higher yield on the balance in your account. Look for banks or credit unions that insure deposits through the FDIC or NCUSIF.
This money is particularly important after filing for bankruptcy because you will have limited access to credit, says Tayne.
If you’re struggling to create an emergency fund, consider getting a second job or a side gig that can generate an extra stream of income.
“Working part-time at an additional job can be challenging, but when you really need to build up savings, it may need to be done,” says Fox.
7. Set financial goals
Do you want to own a home or a car in the future? Or go back to school? After filing for bankruptcy, focusing on your financial future, including these types of life goals, can help you stick to a budget and remain motivated to continue funding your savings.
Establishing financial goals, even putting them in writing somewhere, is an important piece of your overall financial well-being. Achieving your financial goals requires creating a specific, actionable plan to follow. In addition, goal setting can help to break down a large or sometimes daunting objective into smaller, more manageable steps.
You might even consider creating short-term, medium-term, and long-term financial goals. Your short-term goals are items that might require your immediate attention, while medium-term goals are things that you have a bit of time to accomplish. A long-term financial goal would be saving for retirement and other truly long-range plans.
Once you’ve clearly identified your goals and put them in writing, it’s important to follow good money habits moving forward to accomplish your long-term plans.
“Making good decisions about finances and managing cash flow is the best way to secure your financial future,” said Tayne.
The bottom line
While your credit score will typically take a significant hit after a bankruptcy filing, with hard work, patience and discipline it is possible to fully recover and get back on your feet. If you incorporate responsible saving and budgeting habits and work at building back your credit score, you can create a much better future for yourself.