Many clients ask what life after bankruptcy will be like and how long it will take to recover from filing a bankruptcy. For most, life after bankruptcy is much less stressful. You will be filled with an overwhelming sense of relief as bill collectors stop calling, creditors stop breathing down your neck and you can finally see hope for your future, free from the burden of debt. You’ll get to feel optimistic about your future again, happy that you can start fresh and begin to recover and rebuild. No matter what emotions are felt after a bankruptcy is complete, there is one common thread that weaves itself through life after bankruptcy -- the ability to learn from past financial mistakes.
As part of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), each debtor is required to attend a mandatory credit counseling session prior to filing a bankruptcy case and complete a mandatory financial education course prior to receiving a bankruptcy discharge. These classes are designed to help uncover financial mistakes that may have led you to file bankruptcy and give you the tools you need to be successful as you enter life after bankruptcy. Having financial goals and access to tools that allow you to reach those goals is an important part of recovering and rebuilding your finances after bankruptcy. One of the most important lessons you will learn through the bankruptcy process is that creating and living within a budget enables you manage your finances successfully. Your financial education course will teach you the basics of budgeting and how having a budget can help you reach your financial goals after bankruptcy.
Budgeting Basics for Life after Bankruptcy
Living within a budget does not mean that you must do without the things that you desire. On the contrary, creating a budget and living within that budget will help you attain your goals by forcing you to think through where your money is needed and where the extra can be applied. Having a budget gives you power over your finances and allows you to control your money, rather than your money controlling you, your choices and your lifestyle. Below are a few tips for creating a budget after bankruptcy.
Income – Begin by listing your gross monthly income from all sources (i.e. employment, part-time jobs, government assistance, retirement, etc.). From the gross figure, subtract amounts for taxes, insurance, retirement and other deductions to arrive at your net monthly income. Your net monthly income is the maximum amount of funds that you have per month to spend without putting yourself into debt.
Expenses – Next, look at all of your monthly bills and make a list – beginning with the highest priority expenses on top (i.e. rent/mortgage payments, car payments, utilities, food, etc.). Each expense should fall within a specific category (i.e. eating out would be under entertainment or food). Do not forget to include the “small stuff” – items such as pet food, haircuts, trips to the movies, eating out, birthday cards and gifts, school expenses – that eats away at your income little by little, but are often not monthly expenses. (HINT: It helps if you track your expenses for two or three months to discover exactly where your money is being spent each month. Keep a log of every cent you spend. This is very helpful in plugging leaks in your budget.)
Compare Your Income To Your Expenses – Hopefully, when you compare your net income to your expenses you will have a positive number. However, if the number is negative, you are spending more than you earn and must decrease your expenses (i.e. find a cheaper apartment, cut back on eating out, shop at a thrift store, etc.) or increase your net income. This is where the HINT above can rescue your budget. By examining the amount spent on each budget item (i.e. clothing, food, entertainment, housing, etc.), it is easy to see where you are overspending and where you can cut back on expenses.
Living Within A Budget
As you can see, creating a budget is relatively easy -- you subtract your monthly expenses from your net monthly income. Your goal is to have a positive net budget or at the very least, zeroing out. When you find yourself consistently having a negative amount at the end of each month, you are living above your means and probably using credit to supplement your income. This is what often leads debtors into bankruptcy in the first place.
In order to break the cycle, remind yourself why you created a budget -- to break the bad habits that lead you to bankruptcy. You may also create a budget to help you achieve financial goals such as owning your own home, purchasing a new car, providing for college education or starting your family. When you view your budget as a positive tool, to help you achieve the things that mean the most to you, living by a budget will not seem to be as difficult or depressing as some believe it to be.
One last tip for living within a budget -- be realistic and be flexible. Life is fluid and there will be times when you must adjust your budget to allow for unexpected expenses or other changes. Having an emergency fund and budgeting a specific amount each month for this emergency fund will help you avoid destroying your budget when life throws something unexpected your way.
Bankruptcy is a positive step in beginning to rebuild your finances. Schedule a free bankruptcy consultation with one of our attorneys to begin the path toward living life within your means. We can help start you on a path to financial success, free from the overwhelming weight of debt.