A bankruptcy filing is intended to give debtors a financial “fresh start.” However, debtors’ financial futures are only as good as what they can make of it. Fortunately, former bankruptcy debtors have many steps, options, and resources to make the most of their fresh start, and continue the road to financial independence.
Here are a few:
First: Get Serious About Personal Finances
The most important first step for debtors emerging from bankruptcy is to get serious about their personal finances and pay closer attention to income, expenses, and net worth.
A debtor should begin or continue to track this information over time and keep it in mind regularly. A debtor should also seek out information and resources related to management of her personal finances.
A few suggested resources include:
Choose FI – there are a wealth of resources on the website, as well as an informative podcast that covers a multitude of interesting personal finance topics. Subscribers can also sign up for personalized content to be delivered directly to them – all free of charge.
Bigger Pockets Money – Bigger Pockets also has plenty of resources for personal finance and real estate investing. It is a particularly good resource for those who may have an interest in real estate and real estate investments.
For avid users of Instagram, Instagram has many personal finance pages on its platform that provide good ideas. A few suggestions are:
Debtors should also seek out content with whatever form of media they generally engage with. This is a low impact way to get ideas that can change a debtor’s life for the better.
Second: Track and Review Income, Spending, and Net Worth
Debtors should have a financial plan when they emerge from bankruptcy, and a financial plan is really nothing more than a budget.
Sticking to a budget can be difficult, but it is an important tool for planning how to use your money. A budget can also help a debtor prioritize spending needs, identify discretionary spending, and can help with dealing with unexpected or infrequent expenses.
Step1:Setting Up a Budget
A debtor should frequently check in with income and expenses, and setting up a budget is the first place to start. There are plenty of resources online to help with managing and checking in on your budget. Two recommended sites are:
Mint.com – The site is free, and allows users to easily pull transaction details from various accounts (online banking, creditcards, loan details) and categorize income and expense amounts, and compare them to monthly budget figures. A key feature of the site is that to track budget progress, a user does not have to manually enter all her financial information. A user can also categorize income and expenses with one click.
You Need A Budget (YNAB) is a great resource with some similarities to mint.com – it has all the same functionality of pulling transactions and categorizing them. YNAB is more user friendly, customizable, and streamlined on a computer or the mobile app.It also has a lot of educational resources to help users set up a budget, and also assists users by walking through the mechanics of keeping track of finances and working with the system.There is a subscription fee for YNAB, but reviews from users show that subscribing is well worth the money, particularly if it’s a platform a user will stick with. And, a subscription fee is well worth the cost if the platform will help you avoid other expenses like late fees, overdraft charges, excess interest, and unnecessary spending in general.
There are plenty of other online options, so a debtor can certainly find something else that best fits her needs. Non tech-savvy folks may also find it just fine to keep track by putting pen to paper every month!
A perfect starting point for debtors emerging from bankruptcy to formulate a budget is to use their bankruptcy Schedules I and J as a baseline, as these schedules already disclose what a debtors’ anticipated income and expenses, on average per month. But, regardless of the starting point, remember to remain flexible, and don't get discouraged if things don't fall 100% into place - that's the nature of budgeting and planning, and it is okay to make adjustments along the way. The point is to have a plan, and use that plan to make life easier and more manageable
Step 2: Tracking Spending
Once a budget is set up, debtors should continue to check it regularly, as much as every day in the beginning, and then tapering off to weekly, depending on how many expenses/purchases needs to be tracked. Debtors should also write down and categorize all expenses, and, if debtors finds that they are creeping up toward the upper limit of a budget category, they should consider making adjustments as needed to limit over-spending.
Debtors should keep in mind that many budget categories will likely be averages. Coming in below budgeted expenses is great, but it could lead to going over-budget in a future month. It can also be helpful to set up “sinking funds” for various known expenses, like car repairs or Christmas gifts, so building up the cash in a separate account will ensure cash is there when it’s really needed.
A key ingredient is
mindful spending.Some people are forced to be extremely careful and mindful with all spending, due to having limited income and a very restricted budget. Debtors just emerging from a Chapter 13 case are likely used to living with a stricter budget and may be wondering what to do with their excess cash. Or, for a former Chapter 7 debtor, there may be relief at not having to make credit card or medical bill payments. Despite this, debtors should continue to assess purchases before making them and deciding if such an expenditure is accounted for in their budget.
Step 3: Periodically Adjust the Budget
Debtors should review their budget at least every 6 to 12 months to determine how well it’s working and whether adjustments or changes need to be made. Debtors should be realistic about their spending, and should continue to prioritize their spending accordingly. Once a debtor is comfortable with her current budget, it will likely only need periodic tweaks.
Step 4: Track Your Net Worth
Net worth is an individual’s total assets (the value of the stuff one owns), minus total liabilities (how much one owes). It is helpful to track net worth as it helps show whether a former debtor is on the right financial path and making progress toward true financial freedom.
Conclusion: A Path to Success
A debtor should treat their bankruptcy as the fresh start it is intended to be. A big part of staying on track financially is for them to simply be engaged with their finances, and mindfully plan out spending. The tips above will help, but personal finance is personal, and budgeting and money management is not a situation where "one size fits all."
Know that by helping your clients to learn as much as they can about their own finances and about being mindful of income and spending, and in helping them to plan to meet their needs over time, you can help your client on the path to success.
This article was originally published on the State Bar of Wisconsin’s
Agriculture Law and Rural Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar
sections or the
Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.