How to Recover from Bankruptcy (It Is Possible!)
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Many people file for bankruptcy to get out of an overwhelming debt situation. Unfortunately, bankruptcy can have lasting consequences, and getting back on your feet is not always easy. However, with the right attitude and a clear plan, it is possible to rebuild your finances for life after bankruptcy. In this article, we'll explore some of the most common strategies for recovering from bankruptcy so you can make a plan to move forward.
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Types of bankruptcy
The bankruptcy process can be an incredibly helpful tool for resolving financial problems. However, it is important to understand the bankruptcy basics before deciding on a bankruptcy filing. There are two types of bankruptcy for people.
Chapter 7 bankruptcy
This is generally available to individuals or married couples with a household income of less than $50,000 annually. If the income exceeds this amount, Chapter 13 bankruptcy may be more appropriate. Chapter 7 bankruptcy consists of three phases: the "automatic stay" period, the "discharge" period, and the "post-discharge" period.
During the automatic stay period, creditors are prohibited from making collection efforts or taking other actions against the debtor. During the discharge period, the debtor is no longer liable for certain debts and may receive a tax refund previously claimed by the creditor. Finally, the post-discharge period allows the debtor to rebuild credit and obtain a fresh start.
Chapter 13 bankruptcy
Chapter 13 bankruptcy is available to individuals with a regular income and small business owners who cannot file under Chapter 7 due to higher incomes. It is often referred to as a "wage earner's plan." The plan involves the creation of an income-based repayment plan and can last between three and five years. At the end of the plan, any remaining debts are discharged.
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How to recover from bankruptcy?
Focus on rebuilding your credit
A bankruptcy stays on your credit report for as much as 10 years. A low credit score can make it difficult to get loans and other financings in the future. After bankruptcy, you’ll want to do everything possible to rebuild your credit score so that you can re-establish good credit. You could also look into credit repair companies and credit builder loans.
- Timely monthly payments: You should pay all of your bills on time and ensure that the amount of available credit on your credit cards remains low. After all, payment history is an important factor in determining your credit score.
- Avoid adding new debt: You should avoid adding new debt to your financial obligations once you have filed for bankruptcy. This includes taking out new loans or signing up for new secured credit cards. Lenders will be more likely to approve new debt if you have a positive credit history and strong finances. However, there is no point in taking on new debt if your financial problems are likely to continue in the long run.
- Consider talking to a credit counselor: Credit counselors are trained professionals who can help you understand your financial options after bankruptcy. They can also help you develop a plan for getting your finances back on track. Talk to your local consumer credit counseling agency to learn more about your options and schedule a consultation with a credit counselor.
- Credit utilization: Credit bureaus give a 30% weightage to your credit utilization, which means if you max out your cards or stay close to the credit limit consistently, your score will take a hit.
Start saving for the future
Saving for your future is a critical part of recovering from bankruptcy. Bankruptcy can leave a huge hole in your finances, which can take years to recover. It's important to focus on the future to build a better financial life for yourself. As you build your financial portfolio, it’s important to start developing good savings habits to help you achieve your goals. Try to put away as much money as you can each month and begin investing in a retirement fund or other ways to prepare for your future.
Pay off your debts
Whether you are just starting your career or are well established, it is important to establish a healthy relationship with debt. This is especially true for life post-bankruptcy. Having some debt can be beneficial because it can help secure loans and other financial products you may need to help you reach your financial goals. However, it is important to know when your debt is getting out of control so you can take steps to reduce your debt burden and get your finances back on track.
A good way to save money on your bills is to pay them off as soon as possible. The sooner you can pay off your loans, the less interest you'll have to pay in the long run. Also, you're less likely to get behind on payments or incur late fees. You may want to consult with a financial advisor to learn more about reducing your debt load and increasing your credit score.
Related: Which Debts Should I Pay Off First?
Set a realistic budget
If you have missed bill payments in the past, you can’t afford to let things slide once you've filed for bankruptcy. Creating a budget can help you avoid debt in the future and, thus bankruptcy. Take stock of the cash flow every month and create a monthly budget based on your expenses and income. Look for ways to cut back on your spending to save more money each month. Try looking for ways to cut expenses, such as eating out less and cooking at home more. You can also cut back on entertainment costs by watching movies at home or using Netflix instead of going to the movies. Stick to your budget as much as possible and avoid making unnecessary purchases.
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Start an emergency fund
An emergency fund is a reserve of cash you can use to pay unexpected expenses that arise in your life. Having an emergency fund in place can help you avoid debt when facing unexpected expenses. Because the fund's purpose is to be used for emergencies only, you should carefully consider where to invest it. You should look for low-risk investments with little or no potential for gain so that your cash will stay safe and untouched for as long as possible. Some safe investments include certificates of deposit, money market accounts, or government bonds.
Choosing an high-yield savings account for your emergency fund is an important part of the planning process and should not be rushed. Once you have chosen the account that best suits your needs, you can continue saving until you are satisfied with the amount of funds you have accumulated. If you already have a savings account, you set up automatic transfers from your checking account.
The general rule of thumb is to have three to six months' worth of expenses in your emergency fund. Save some of your monthly income to help build up your savings. To increase your emergency fund more quickly, look for opportunities to cut back your expenses or earn extra money on the side. By starting early and regularly contributing to your emergency fund, you can feel confident that you will be able to handle any unexpected financial crises that come your way in the future.
Invest your money wisely
Investing is a great way to grow your money and build wealth for the future. There are many different types of investments available, including stocks, bonds, mutual funds, exchange-traded funds, real estate, and more. Before investing your money, it's important to research each investment option carefully and choose one that is right for you. Investing in a retirement plan such as a 401(k) can also help build your nest egg for the future.
The stock market can be a great place to grow your wealth over the long term, but it can be a risky place to invest if you are just starting. Depending on your financial goals and risk tolerance, you may be better suited to invest in different types of investments. A financial advisor can help you choose the investments that are right for you and help you develop a plan to reach your financial goals.
Protect your identity
Identity theft is a growing problem in the United States, with millions of people becoming victims of fraud each year. It's a good idea to monitor your credit report regularly to check for any suspicious activity. It's also important to maintain complex passwords. If you're a victim of identity theft, report the incident to authorities immediately.
Plan for your retirement
Many people underestimate the amount of money they will need to retire comfortably. The best way to determine how much you need to retire is to create a budget based on your income and expenses. Once you know how much you spend each month, you can find ways to cut your spending if necessary to increase your savings. Be sure to save enough money to cover all of your living expenses in retirement.
Your retirement years should be a time of relaxation and freedom. Establish an investment portfolio that can help you reach your financial goals and set aside enough to cover your expenses once you retire.
Educate yourself
One of the most important things you can do to help secure your financial future is to educate yourself about personal finance and the broader money management topic. Many websites, podcasts, and magazines can teach you important financial lessons. The more knowledge you have about handling your money, the better prepared you will be to manage your financial future. Many banks also offer free financial literacy courses to help you take control of your finances and learn valuable skills to help you succeed financially.
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The bottom line
These are just a few steps to getting back on track after bankruptcy. You should take some time to evaluate your financial situation and plan to get your finances back on track. A bankruptcy attorney can best explain the details of the process and help you determine whether Chapter 7 or Chapter 13 would be the most appropriate course of action for your situation.
If you continue to struggle, don’t hesitate to ask for help from a qualified professional. A second chance can be a long and difficult process, but it's a journey worth taking if you want to set yourself up for success down the road. Think about the long-term goals you have in life and how you'll reach them.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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