A completed Missouri bankruptcy case is a huge relief, but the road ahead of you may seem filled with new challenges. You might find yourself wondering, “how do I make the most of the fresh start bankruptcy has given me and avoid getting into trouble again?” To start fresh and stay fresh, you’ll have to put your past behind you and learn these healthy new financial habits.
There are countless reasons to start using cash for all your purchases. For one, it’s impossible to spend more than you have. What’s more, you’ll naturally spend less: using cash forces you to become a more conscious spender. Although it may seem inconvenient or even old-fashioned, it’s a great way to avoid overspending.
Just Say ‘No’ to New Unsecured Debt
When your Chapter 7 or Chapter 13 bankruptcy is discharged, you might start seeing loan offers in your mailbox. Lenders target people who are fresh out of bankruptcy because they can get away with charging extremely high (and very profitable) interest rates. If credit card, personal loan, or car financing offers start arriving in the mail, throw them out right away.
Stick to a Budget
Your debts are gone, but chances are that money is still tight. Create a no-frills budget by listing all your necessary expenses, including rent or mortgage payments, utilities, car insurance, and groceries. Don’t forget student loans and child support payments, if you have them. Subtract your expenses from your income. If there’s money left over, great. If there isn’t, you’ll need to trim your expenses—or increase your income—to avoid falling back into debt.
Having savings will help you stay free of debt. When there’s money in the bank to cover unexpected expenses like medical bills or car repairs, you don’t have to rely on a credit card. Take the money that’s left over in your budget and deposit it into your new savings account.
It’s a great feeling to watch that balance grow, but it can be tricky to find extra money to save. Here are some ideas:
- Working toward getting a raise—and depositing the difference
- Tax refunds
- Selling extra stuff
- Taking a second job
- Reducing living expenses
Establish an Emergency Fund
Your first savings goal should be to establish an account for small emergencies. A good starting range is $500 to $1,500, depending on the types of expenses you think you might have. Remember that you can only use it for true emergencies! If you do dip into your emergency fund, top it off as soon as possible.
Save for Retirement
When your emergency fund is up and running, it’s time to plan even farther into the future by making contributions to your retirement account.
Build Your Savings
Once you get into the habit of saving, see if you can increase your goal. St. Louis financial experts recommend saving at least 10-20% of your income and keeping enough in savings for at least six months’ worth of expenses. This can seem intimidating, but don’t worry. Just start small and work your way up.
Save for Large Purchases
Before bankruptcy, you might have financed large purchases. To maintain your new debt-free lifestyle, it’s important to save for them in advance. Whether it’s a vacation, a down payment, or even holiday gifts, planning ahead will help you save for your goal.
First, estimate the true cost of the purchase, including taxes and extra fees. Then, determine a savings timeline. Will you take that trip in three years? Five years? The longer you give yourself to save, the easier it will be.
Finally, divide your total cost by the time you’ve given yourself to save. Add your savings payments to your budget, and treat it with the same commitment as you do your utility payments and other expenses. Transfer the money to a separate account, if at all possible.
Take Steps to Re-establish Credit
Many people believe the very common bankruptcy myth that a bankruptcy will ruin your credit score forever. Although it is true that a bankruptcy can remain on your credit report for up to 10 years, you can start working to rebuild your credit as soon as your bankruptcy is discharged.
Review Your Credit Report and Credit Score Regularly
When your bankruptcy case is closed, it may take a few months for your former creditors to report your discharged debts to the credit bureaus. At this point, it’s important to start monitoring your credit report and checking for errors.
Make sure that your discharged debts are reported with a zero balance. If pre-bankruptcy debts aren’t zeroed out, they’re counting against you—which is the last thing you need when you’re trying to rebuild your credit. Dispute any errors you may come across so that they can be corrected.
Secured Credit Cards
Rebuilding credit is a catch-22: you have to have credit to build credit, yet without a strong credit history, lenders will deny you loans. If you don’t qualify for a credit card or simply don’t trust yourself with one, it may be worth considering a secured credit card. Secured credit cards are opened with a cash deposit, which determines your credit limit.
Pay Your Bills on Time
Payment history makes up the biggest percentage of your credit score. Think about it: lenders want to know that you keep your accounts in good standing. To boost your credit score, always pay your bills on time.
Don’t Finance Major Purchases
If at all possible, avoid purchasing big-ticket assets like a home or a new car for at least a year after your bankruptcy. The second-largest component of your credit score is the amount you owe, so major purchases will make it extremely difficult to increase your credit rating.
Start Fresh and Stay Fresh
When you filed for bankruptcy, you were probably dreaming of the day when you would be free from the burden of debt. Now that debt-free day has come, and it’s your responsibility to stay out of financial difficulty.
Breaking the debt cycle is difficult, but doable. Developing good spending habits and money-managing strategies will help you enjoy your financial freedom both now and years into the future.