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How To Rebuild Your Financial House After Bankruptcy

By Mark Riddix

The current economic crisis has caused millions of Americans to lose their homes and has forced many to insolvency. Some have been forced to take the drastic measure of declaring bankruptcy. There is no shame in declaring bankruptcy. It may be a necessary step for some people that are overly leveraged. While going through a bankruptcy is a tragic experience, you can use the experience to get your financial house back in order. Instead of dwelling on it and being negative, you can take steps to rebuild your finances and change the habits and decisions you made that may have caused you to file for bankruptcy. Here are 5 easy steps for recovering from bankruptcy.

Establish a budget.

Think of a budget as a roadmap which will guide you on your financial journey. A budget should help you stay out of debt by placing constraints on your spending. Create a budget that is realistic for you to stick to and is in line with your financial goals. Most people structure their financial plans around their expenses. Instead, structure your plan around your savings goals. Determine exactly how much money you are aiming to save each month and then structure your future expenses around that. Set a goal of limiting your expenses to no more then 50% of your income.

Pay off your outstanding debts.

The common belief is that bankruptcy will get rid of all your debts, leaving you a debt free future. In the words of Lee Corso, not so fast, my friend! Just because you have been granted a bankruptcy, doesn’t mean that all of your existing debts have been discharged. Bankruptcy courts will discharge many of your unsecured debts, but they may still hold you liable for many of your secured debts and debts to the government such as student loans, alimony, and child support.

Build a financial cushion.

Having sufficient cash reserves will keep you from stressing out and worrying over your ability to deal with a financial emergency. Unexpected events like job loss or medical emergencies can occur at any time. When these unplanned emergencies arise, your financial cushion will allow you to stay afloat. The larger your financial cushion is, the better off you will be. Paying cash is typically better then paying by credit for just about everything.

Re-establish your credit rating.

Eventually you will have to rebuild your credit score. You don’t want to rush into this because you could end up right back in the same situation as before. Only take on as much debt as you can pay off right away. If you were able to save the house in the bankruptcy, then paying the mortgage on time EVERY month will help build your credit rating back. If you lost the house, then we suggest renting for a few years, and keep record of how you paid the rent on time every month. This will help in your quest for qualifying for another home loan. We don’t suggest applying for more credit cards to re-establish your credit. Credit cards might have been part of the problem that got you into a financial mess, so like Dave Ramsey says, “if you play with snakes, you’re going to get bit.”

Be patient.

Remember that Rome wasn’t built in a day. Your credit was not ruined in a day, so it won’t be rebuilt overnight. It’s going to take time for all of the dings on your credit report to disappear. Creditors can leave negative information on your credit report for up to 10 years after a bankruptcy. Check your credit report regularly to make sure that it is accurate. Creditors have no motivation to report that you are no longer liable for a debt once it has been discharged. You may need to contact the credit bureaus and inform them that the debt is no longer open and should have been included in your bankruptcy filing.

Remember to let a bankruptcy motivate you and stay positive. It may be difficult to do, but it will make the whole process go easier. If you’ve recently gone through a bankruptcy, you may want to invest some money in talking with a financial counselor or a financial advisor that you personally know and trust.

(Photo credit: taberandrew)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, Your Financial Playbook.

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