The following post is a guest contribution. If you’d like to write for My Money Design, please feel free to contact me.
Although it may end some of your financial troubles, filing for bankruptcy is not just something that you do once and the work is over. In fact, unless you want to file repeatedly throughout your life, the real work begins after your debts are discharged. Asking how does bankruptcy work is a question that few people ever really take the time to understand, but they should so they can save their finances. If you don’t have debts like student loans or overdue taxes, you may get your debt balance reset to zero, but if you remain in an impossible financial situation then the relief is only temporary.
Even before you can file for bankruptcy, you have to consult with an approved credit counseling agency to see if there is any other way to resolve your debts. This can be done either online, over the telephone or in-person. You do have to pay a fee, generally around $50, for the counseling, but if you can prove that you can’t afford the fee it may be waived. The credit counseling agency will look at your personal financial situation and see if they can come up with a feasible plan to repay your debts. You must complete this step before filing for bankruptcy in order to prove that you have explored other alternatives.
Once you have completed the requirement, the credit counseling agency will issue you a certificate as proof that you received the required counseling. A word of caution though, if the credit counseling agency finds a feasible way for you to repay all of your debts, then the court may force you to file a Chapter 13 bankruptcy, which means that you will have to agree to a repayment plan. However, even if this is the case, you may be able to negotiate with the court which debts you should legitimately have to pay and which you shouldn’t. Ultimately, the court will decide which debts you will remain liable for.
Post-Filing Debtor Education:
Even after you file bankruptcy and your debts are discharged, you still have to attend another educational session. As with the pre-education, the post filing debtor class must be conducted by a state approved debtor education provider. This is a condition of filing Chapter 7 bankruptcy and it is court-ordered, so you cannot skip this requirement even though you may feel that it is unnecessary. Although many people feel that the information provided about financial planning, creating a budget and managing money better is “useless”, the education is mandatory.
Post-filing debtor education is indeed useful, but it is a difficult pill to swallow for those whose expenses for human needs still outweigh their income. The education will help you manage your money, but it doesn’t force you to make the type of lifestyle changes that you need to make in order to become financially sound again. In that sense, the post-course is only partially helpful because it gives you information and tools to help you manage your personal finances better, but when it comes down to actually using those tools, the choice is entirely up to you.
Creating a Financial Plan:
If you truly do want to take advantage of your new start and do a better job of managing your money, the first thing you will need is a financial plan to budget your money. A basic financial plan will include your income and your expenses. If the latter exceeds the former, then you have to either reduce your expenses or find a way to significantly increase you income. However, if you really want to put yourself on financially stable ground, then your financial plan should include saving goals such as creating an emergency fund and putting money away for your retirement as well.
Keep in mind that while cutting out overspending is imperative, it is equally important to leave yourself some wriggle-room in your bank accounts. Your income needs to always exceed your expenditures so that you have some “funny money” on hand for the unplanned expenses, because they can and will happen, usually at the worst possible time. The last thing you want to do is have to borrow money and go back into debt when you’re trying to recover from bankruptcy. There will be a time when you should start to repair your credit scores, but that should be after you learn how to keep your budget balanced and you can manage credit responsibly.
You Have to Change:
It bears repeating that filing for bankruptcy, getting financial education, and creating a budget, unless you stick to it, will all fail to do any long-term good unless you remain disciplined. According to debtconsolidation.com, you need to evaluate all purchases on a “want” or “need basis. Limit your “wants” to what you can pay for with cash, without cutting yourself short in other areas of your budget. This means that you might have to sacrifice things you enjoy like nights out with your friends, premium cable services, and seasonal shopping sprees.
Changing bad spending habits is like quitting smoking or starting a healthier diet; it is one of those things that you have to do in order to reach a goal. Your goal should be to make your living situation financially viable without accruing massive amounts of debt. In other words, you have to live within your means and accept the fact that there are simply some things that you can’t afford no matter how much you may want them. Like dieting and smoking cessation, your finances will be much healthier in the long term if you make some short-term sacrifices.
Filing for bankruptcy may work for existing debt, but it is really only a temporary solution unless you stop recklessly accruing debt. Some people, even celebrities, file for bankruptcy repeatedly because they refuse to change how they manage, or, more appropriately, mismanage their money. If you want to be one of the people who succeeds where others often fail, then realize that filing bankruptcy is only the first step in the process. All the other steps are doing whatever you need to do to keep yourself from getting overwhelmed with debt ever again.
About the Author: Tony Standin is a personal finance specialist. In terms of bankruptcy, he speaks from experience, and his goal is to help others either avoid or move through the process as painlessly as possible.
Images courtesy of iStockphoto