Nobody likes to think about bankruptcy. But lawyers who practice bankruptcy law say the consumers who bounce back strong are those who have a plan to reset their finances and rebuild after their mistakes. Here’s what you need to know if you’re dealing with a bankruptcy.
Pay yourself first
It may sound counterintuitive, but one of your first steps after bankruptcy should be rebuilding your savings, which were likely wiped out by filing, says lawyer David Leibowitz of Waukegan, Ill.
“Paying yourself first gives you a financial foundation to protect you against unexpected events in your life,” says Leibowitz. “It’s much better to have a rainy day fund than to have to depend on friends, family, relatives or even worse, payday loans.”
According to Leibowitz, 5 percent of your net income can go a long way to rebuilding savings. And if you set up a recurring, automatic withdrawal from your checking to your savings account, you won’t even have to think about it.
Automate your bills
Paying a bill late is never a good thing. But if you’re coming out of a bankruptcy, it’s crucial to pay your bills on time because that’s how you rebuild your credit.
“The common mantra is don’t be a day late or a dollar short,” says Melissa Herman, an attorney in Woodstock, Ga., who advises her clients to set up automatic payments on recurring bills such as rent and utilities and keep all other monthly expenses to an absolute minimum.
It may be the last thing on your mind, but closing a bankruptcy case can be a perfect moment for teaching your family a valuable lesson about money, says Denise Brown, an attorney in Louisville, Ky.
“Use this as a teachable moment for your spouse and children on what you learned from the experience,” Brown says. “Whether your bankruptcy was caused by the loss of a job, a family divorce, or too much spending, the path needs to be put in context and understood so that we don’t follow this path again.”
According to Brown, clients who talk about their mistakes with their family rarely return to bankruptcy court. And by sharing your plan to get back on track, Brown says many clients find that their family members can help hold them accountable.
Set a real budget
Any plan for putting your finances back together after a bankruptcy is going to include a budget, but it has to be realistic, says Brown.
“In most Chapter 7 (personal bankruptcy) cases, the budget is negative,” says Brown. “There’s not enough income and too many expenses. Start by reviewing that budget and getting it in line with reasonable family needs. That may mean getting rid of cell phones, cable, eating out and other family treats that may need to take a back seat to more important needs.” And it should absolutely exclude items that you have to finance.
Manage your credit report
While it’s always a good idea to stay on top of your credit report, it’s absolutely essential to do so after a bankruptcy. Brown advises her clients to pull their credit report 60 days after their case closes to check for any errors. Chances are there will be some mistakes. But that doesn’t mean you should hire a credit repair company.
“Do not be sucked in by credit repair companies,” says Barry Roy, an attorney in Livingston, N.J. “Most of these are shams that are in business only to take your money. The truth is nobody can legally remove accurate negative information from a credit report. Credit reporting agencies are obligated under the Fair Credit Reporting Act to correct or delete inaccurate, incomplete or unverifiable information, usually within 30 days. They are not required to remove accurate information unless it is more than seven years old or bankruptcies that are over 10 years old.”
If you do find errors on your credit report, Roy advises consumers to try fixing them on their own. “An individual has the absolute right to dispute any inaccurate or incomplete information on their credit report, and the credit reporting agency must investigate the dispute without charge,” he says.
Get a secured credit card
After a bankruptcy closes, you’re likely to get a “slew of credit card offers in the mail,” says Michael Dye, an attorney in Raleigh, N.C.
“These credit offers aren’t out of the goodness of the credit card companies‘ hearts,” Dye says. “The debtor is now a ‘safe bet’ because the credit card companies know that they have a time frame of four to eight years where the debtor won’t be able to discharge anything in bankruptcy.”
According to Dye, consumers should simply throw out the credit card offers they get after bankruptcy, because the interest rates are too high and the risk is too great.
But some bankruptcy lawyers say consumers may want to look into a secured credit card after their case closes. Most major banks offer secured cards, and borrowers are limited to spending only what they can put on the account ahead of time. However, if you’re looking for that secured card to help improve your credit score, Roy says you should make sure the issuer reports to one of the three main credit reporting agencies.