First, let’s get something out of the way: declaring bankruptcy does not make you a failure or a deadbeat. It is one of the many negative and pervasive myths about bankruptcy that people who file for it are either dumb about money or are recklessly irresponsible and just don’t care. The fact is that there are a lot of completely legitimate reasons to declare bankruptcy and to try to give yourself and your family a fresh start.
In a lot of cases, the declaration is the most responsible thing you can do!
Unfortunately, the declaration of bankruptcy is not a severe dividing line between then and now. No, it is a lengthy process and it can be arduous. You don’t simply declare yourself bankrupt and start fresh the next day. Everything about your financial situation will be evaluated and, though you might not have to continue paying your creditors after you’ve declared, the money you earn isn’t necessarily yours to spend as you want, either.
How much of your money is really yours depends upon the type of bankruptcy you declare. For example, according to Doan Law Firm, which specializes in California bankruptcy law, if you file for bankruptcy under Chapter 13, you’re simply reorganizing your debts, so you will likely get to keep more cash on hand for expenses. With Chapter 7, conversely, the cash you have on hand can be seized to help pay off your creditors.
There are some accounts, like certain retirement accounts, that are considered “off limits” for seizing and you might even be allowed to continue contributing to them while you work through your bankruptcy filing.
The point is: it’s complicated. This is why it is imperative that you hire a professional to help you with the process. Trying to navigate bankruptcy on your own (and with clever articles like this one) increases your chances of making mistakes. Hiring a bankruptcy attorney will cost money, yes. It is not money you can discharge as a part of your bankruptcy. Even so, the money you spend on your attorney will be less than what you would be penalized for incorrect filing or trying (or seeming like you’re trying) to thwart the system.
When It’s Time to Start Over
After you’ve finished your filing and your bankruptcy has been sufficiently resolved to the court’s satisfaction, that’s when you really get to start over. Here are the first things you need to do to set yourself up for financial success.
Start Saving: If you declared bankruptcy, you’ve likely been living paycheck to paycheck for a little while. Trying to save money when you are living paycheck to paycheck seems counter-intuitive, but it is important. Even if you can only save a little bit of money at a time right now, it is better than nothing. There are lots of great weekly savings plans out there that help you save without forcing you to only eat ramen all the time. It’s important to save and replenish emergency funds, etc because you don’t want to fall into the trap of relying too heavily on your credit.
Start Rebuilding Your Credit: Wait, didn’t we just say that you shouldn’t rely on credit? It’s true: you shouldn’t. Even so, it is important to start rebuilding your positive credit and proving to future lenders, landlords, etc. that you can handle credit and payments responsibly. The best way to do this is with a secured credit card. You can open a secured line of credit with your bank at any time because you give them cash as collateral (that they keep if you default on your payments). Another great option is to apply for a bankruptcy car loan or similar, especially if you file for Chapter 7 bankruptcy.
Rebrand Your Lifestyle: There is no better time to get intimate with frugal living than after declaring bankruptcy. You’ve been given a fresh start! Learn how to search for deals and find the things you need at affordable prices. Figure out what you can and can’t live without. Living frugally doesn’t have to mean going without or being cheap. It’s more about being smart about where your money goes.
Figuring out how to live while and after filing bankruptcy is challenging. There are very specific rules about how much of the money you earn during the filing process you get to keep. There are specific rules about what and what can’t be seized to help pay off creditors. And then, once it’s finished, the temptation to live a little bit large for a while as a celebration is strong. Work with your attorney to make sure you don’t accidentally torpedo your filing and then, afterward, work to build good habits! You can do it!