While bankruptcy offers debtors a fresh start, it's vitally important that they begin focusing on establishing healthy spending habits and rebuilding their credit as soon as possible. For debtors who filed a Chapter 7 bankruptcy, they can begin working on their budget and their lifestyle as soon as they file for bankruptcy, and they can begin rebuilding their credit once their bankruptcy is discharged. For Chapter 13 filers, while they have 3 to 5 years before they obtain their discharge, they too will benefit enormously by improving their financial health.
It is true that bankruptcy remains on one's credit for ten years, but this doesn't mean that the debtor can't rebuild their credit in the meantime. Most people who file for bankruptcy already have damaged credit, and by wiping their slate clean, they can usually rebuild their credit much faster than if they had chipped away at mounting interest and penalties over the next ten or twenty years. If you're worried that your creditor will view you differently or take it personally if you file for bankruptcy, don't be because they won't. Filing for bankruptcy is a business maneuver and our own federal government lends its full support, especially in this economy. Detroit in particular has suffered severely from unemployment and you can take comfort in the fact that you are not alone. There are many Michigan families that have been negatively impacted by the financial crisis and there is no shame in trying to relieve yourself from the burden of overwhelming debt.
Make a Budget and Stick to it!
When one files for bankruptcy, it's important to understand what circumstances led them to filing in the first place. Obviously, if you were laid off from the factory where you worked for ten years, you're going to have to get re-hired or find another job if you want to rebuild your credit. Having a steady monthly income source is essential for rebuilding your credit after bankruptcy. So, assuming you are employed and have enough money coming in every month, the next step is to create a realistic budget and stick to it.
Sit down and make a list of all of your monthly expenses, these will include: 1) your rent or mortgage payment, 2) utilities such as water, electricity, gas, and trash etc. 3) groceries, 4) gasoline, 5) your car payment/s, 6) auto insurance, 7) medical or life insurance (where applicable), and 8) credit cards. Once you have calculated all of your basic necessities, it will be necessary to include petty cash for small weekly expenditures (which are unavoidable if you have children), money for clothing and any other monthly bills such as extracurricular activities for the kids.
Once you take a look at your monthly budget, you will be able to evaluate where you can cut back. It's very important to save money from each and every paycheck, even if you start with just 10%, this way if someone breaks into your car and you have to come up with a $500 or $1,000 deductable, or if you need an emergency root canal, or if your car battery dies, you have the cash set aside to pay for these emergency expenses.
In most cases when people see everything on paper, they not only determine their priorities such as paying for housing, utilities, gasoline and insurance, but they are able to see where they can cut back on expenses too. Some people actually benefit from tracking their small purchases, and when they take a look at what they are buying, they realize how unnecessary purchases quickly add up. For example, buying a $4.00 cup of coffee Monday through Friday adds up to $20.00 a week, that's $80.00 a month, and $960.00 a year. How about those who buy lunch every day? If you spend $15.00 a day eating out, that amounts to $75.00 a week, and a whopping $3,900 a year! It's pretty amazing how making small lifestyle adjustments can save a lot of money over the course of a year. Some great ways to cut back on expenses include:
- Clip coupons for groceries;
- Limit dining out, cooking at home is much less expensive;
- Bring lunch to work or school instead of buying;
- Price comparison shop for everything that you buy big or small;
- Purchase clothing items only when they are on sale or on clearance;
- Take advantage of free shipping on Amazon or for major retailers online;
- Buy "forever" stamps;
- Support your local library, rent books and DVDs instead of buying;
- Purchase Entertainment Books, they have coupons for major restaurants and retailers; and
- Teach your children to enjoy free outdoor activities such as walking, visiting the park and riding their bicycles, their health will benefit too.
Aside from saving at least 10% from each paycheck and cutting back on expenses, it's absolutely imperative that you pay all of your bills on time. The three major credit reporting bureaus Experian, TransUnion, and Equifax keep track of your payment habits. If you go 30 days late on your car payment or a credit card, it will be reported to these three credit bureaus and you don't want any negative mark whatsoever on your credit following a bankruptcy discharge.
Get Out There and Get Credit!
While many debtors swear off credit cards after bankruptcy, this is the last thing you want to do. After bankruptcy, credit cards are your best friend and this cannot be stressed enough. There is one of two options following a bankruptcy; you can either get a secured credit card with a bank or you can get an unsecured credit card. With a secured card, you would hand over the cash to the bank and this would be your credit limit. For example, if you give the bank $300, your credit limit will be $300. You will have to watch for bank fees, so it's a good idea to compare banks before you get a secured credit card. After you've established a good payment history with the bank, the bank will generally issue you a non-secured credit card after a period of time.
The other option is to get an unsecured credit card on your own. This is relatively easy to do online since there are a number of credit card websites that allow you to compare credit card offers side-by-side. While your interest rate will be high initially, by charging a small amount every month and paying it off in full, you can expect your credit score to improve accordingly over the next 12 to 24 months. It's a good idea to get two or three credit cards initially, and to make sure that you use them but only a small percentage of your credit line, say 10 or 20%, and to pay them off each month. You can get secured and non-secured cards and by paying off the balance every month, you won't be paying interest.
It's usually more difficult to get a credit card from a large retailer such as Best Buy, Target or Wal-Mart right after a bankruptcy as these companies usually use large banks such as GE Capital and Capital One, but it is not unrealistic to obtain cards from such stores after the debtor has demonstrated their creditworthiness for a few years following a bankruptcy discharge with their other credit cards.
By ensuring that you have a steady source of income coming in, and by sticking to a healthy budget that includes putting away money for a rainy day, and by rebuilding your credit through credit cards, you can put yourself on track for establishing a good credit score long before your bankruptcy falls of your credit report. All it takes is a sound budget and a little discipline to build good spending habits and a brighter financial future. To learn more about life after bankruptcy and credit restoration, contact a Detroit bankruptcy attorney from the Law Offices of Marshall D. Schultz today!