Any decent financial advisor will be careful to warn clients against the perils of taking on too much debt. Not only will a heavy debt load damage your credit score, it will put you at a much higher risk for bankruptcy, especially if you suffer a job loss.
Bankruptcy presents some major challenges for individuals and families, who may need to give up some major assets in exchange for a "clean slate," so one would expect them to do everything possible to avoid a second bankruptcy. But old habits die hard, and without good financial counseling a person remains vulnerable through poor decision-making.
After interviewing several financial consultants and bankruptcy attorneys, it is obvious that something needs to change. One bankruptcy should be enough for anyone's lifetime, so be sure to make these lifestyle changes immediately.
Four changes to make after bankruptcy:
Live within your means. This statement has different meanings to different people, but in an effort to keep it simple; "living within your means" is spending only the money you have coming in currently. This means no purchases on items you cannot afford, and paying the full balance of any credit card purchases every month.
Begin rebuilding credit scores only by purchasing what you know you can afford. While it may be true that buying a car, getting credit cards or renting an apartment will speed your post-bankruptcy rebound, it can be dangerous to take on too many obligations too quickly. Be smart about the method you use to rebuild your credit score, and keep your monthly payments affordable.
Build an emergency fund. This will help in many ways, but first and foremost it will keep you from incurring unnecessary debt. Examples include unexpected medical bills, job loss, or replacing major appliances. When the cash is in the bank, there is no need to pull out the credit card.
Create an honest budget. Start by knowing exactly how much you bring home each week or month. Be sure all your expenses and bills can be paid through this income. Only then will you be able to avoid racking up more debt and falling into a dangerous financial situation.
Other important changes to make right away:
- Make a very specific monthly budget that includes all of your expenses as precisely as possible, making sure to account for everything that is coming in and out of the household. For subjective expenses, such as food, be realistic and don't underestimate spending.
- Don't compare yourself to others. Looks can be deceiving; it's hard to figure out people's financial situations just by looking at them. People will often spend needlessly and buy a bunch of luxury items only to find they don't have any money left over at the end of the month.
- Avoid credit cards unless you are using them to rebuild creditworthiness. If you must make a purchase on a credit card, paying it in full should be counted within your monthly budget.
- Practice restraint. If you fell into bankruptcy because of careless spending, realize that you are going to have to constantly resist the urge to buy things. Don't make large purchases you can't afford.
- Get organized. Have your budget and documents neatly filed away and easily accessible. This can help you adjust your budget accordingly.
The best way to avoid a second bankruptcy is to properly deal with the habits that got you into bankruptcy in the first place. You need to train yourself to recognize your own behaviors and make an immediate plan to combat them. However, if you still find yourself in a desperate financial situation there are things that can be done right away. A Colorado Springs bankruptcy attorney can help get you back on track.