All of us know that bankruptcy can rip apart our credit score… and make us think that there is no way we can improve our credit score after bankruptcy. While, the negative effect of bankruptcy on credit score is a well-known fact, it is possible to start improving your scores quite quickly. Also, this might be a good time to sit, analyze and plan how best you can achieve your financial goals and negate the effect of bankruptcy on credit score.
Start with analyzing the cause of bankruptcy
There could be several reasons why you became bankrupt and you need to find these reasons before you start on your new journey. The following reasons are possible:
1. Plain indiscipline in spending money: Many people are not careful with their expenses and just go about spending whatever money they have without any kind of financial planning. They would take loans and get multiple credit cards and just keep spending money on things they want (and not really need). And their alibi is that “Let’s live in today and for today”. But if you don’t plan your finances, you are sure to hit a disaster… even ants save for a rainy day, don’t they?
2. A big unexpected expense: Several people jeopardize their finances due to an unexpected, big expense e.g. a big medical bill or hit by a scam etc.
3. Increase in monthly expenses: Due to inflation or due to increase in the family size, your monthly expenses might have increased beyond your expectation… or you might not have planned at all for such an increase. Hence, you might have defaulted in paying your bills and installments… thereby leading to bankruptcy.
4. Earning depletion: Loss of job (or source of income), business losses, reduction in salary etc. could be various reasons for your earning depletion… and this might have left you in a financial jeopardy.
If you look at all these reasons, you will find that financial planning and discipline can eliminate most causes.
You must first make a list of your financial goals – long term, short term and medium term. So, it is a list of all financial goals that you have. To discover these financial goals, you might need the help of a financial planner or a professional. However, you can also do it yourself by researching a little bit on your own. The financial goals will include:
- Things that you are planning to buy e.g. a home, a car, appliances or just something that you fancy.
- Vacations or trips (annual or one time).
- Medical expenses.
- Retirement planning.
- Marriage or other family obligations.
- Emergency fund.
And you must also prioritize your goals so that you know in what order you must channelize your funds. Yes, this financial planning is very important… and you must document it. You must also make a list of your liabilities and assets e.g. liabilities will include – regular monthly expenses including monthly installments; assets will include – your home equity, other things that have some market value.
Then you must make assessment of how feasible your financial goals are and, based on your income/assets/liabilities, either strike off impossible goals or try to find ways/means to increase your income and reduce liabilities… this might typically mean working extra, looking for a better-paying job or selling assets to reduce liabilities (or meet some financial goals), taking advantage of sales/discounts/coupons (including garage sales) etc. Here it is important to mention that medical cover, emergency fund and retirement planning are very important items that many people miss while doing their financial planning.
Note: Here it is very important to clarify that those people who think that bankruptcy is a nice and easy way to spend someone else’s money and then walk away smiling, are in for a shock. It is important to note that there are rules that prevent you from filing another bankruptcy for a long period of time (few years) after you have filed one bankruptcy.
Tackling the indiscipline
Make a list of do’s and don’ts for yourself… based on your previous mistakes. This is something that you should keep handy and ensure that you stick to it. This will also mean that you would buy only things that you need and not things you want. Always ensure that you dedicate your funds to your financial goals in the order of priority that you have decided.
Once you have done this initial analysis and planning, you need to execute the plan and also work towards improving your credit score after bankruptcy (e.g. by using secured credit cards, small installment loans and paying all your bills on time).