8 Steps to Create a Bankruptcy Recovery Plan

From the 7th to the 20th March 2022, 347 people declared bankruptcy.

Filing for bankruptcy might feel like rock bottom. While it provides temporary relief, it can significantly affect your long-term finances. However, it's certainly possible to bounce back from bankruptcy and start your financial life afresh.

What Does Life After Bankruptcy Look Like?

Anyone who recovers from bankruptcy will know the struggle and hardships. You'll have to manage cash flow, reestablish good credit, and rebuild a financial portfolio. It might seem like an impossible task, but it doesn't have to be. Follow our tips to recover from bankruptcy quickly.

Step 1: Save all Paperwork

Ensure you save all your paperwork from the bankruptcy case. While it may not seem crucial now you're out the other side, your bankruptcy will, unfortunately, never entirely leave you. 

Banks, lenders, debt collectors, or other financial institutions may ask you for copies of bankruptcy files in the future. If debt collectors come calling for a debt you believe the bankruptcy cleared, your files will act as proof. Keep all your paperwork to hand to ensure you start with a clean slate.

Step 2: Cooperate With Your Trustee

To ensure a smooth and quick recovery, you can best cooperate with your trustee during bankruptcy fully. The trusty manages your bankruptcy — you'll need to declare your income, assets, and debts to them. They may sell your assets to cover your debts and will help you comply with bankruptcy requirements.

They will help you manage a director penalty notice and other potential personal liabilities if you're a company director.

Step 3: Don't Borrow Money

While it's technically possible and tempting to apply for loans while bankrupt, it's best to avoid taking on new debt. Not only will lenders offer high-interest rates, but you'll only worsen the problem. If you take on a new loan, ensure you can meet the repayments and avoid applying for multiple loans. Rejected loan applications will damage your credit score further.

Step 4: Maintain Your Job

Maintaining a stable job is essential. You need to show future lenders that you have a reliable, steady income stream and will manage to repay debts. Consistent income and employment will improve your chances of loan approval. Whereas hopping between jobs or employment gaps suggests you're a risk.

Step 5: Start Saving

When filing for bankruptcy, you probably drained all your savings. One of the critical steps you should take to rebound is to begin saving again. When you receive your paycheck, determine how much you can set aside each month. The average person has $3,559 in savings. Don't put too much of your earnings into inaccessible accounts. As little as 5% of your salary will soon add up.

Consider which savings account options have the best rates. If you have a habit of unnecessary overspending, put your savings in less liquid accounts to avoid the temptation to withdraw your money.

Step 6: Set up a Budget

Set up and follow a realistic budget to get your spending back on track. Determine where your money goes and keep an eye on all your expenses. Tracking your spending habits will help you spot areas you can save. Your budget should include:

• Utilities.

• Rent or mortgage.

• Phone bills.

• Groceries (realistic amounts).

• Entertainment.

Subtract your total expenses from your income. If you're spending more than you bring in, you need to tighten your budget or source another income stream.

Step 7: Reestablish Good Credit

Your credit report will inevitably take a hit when you declare bankruptcy. You can request one credit report annually from one of the three leading credit reporting agencies. Review your report for errors and red flags. If you notice any mistakes, contact the agency. 

Next, you'll need to make a plan to improve your score. Future lenders, landlords, and banks will use your credit score to assess your eligibility and risk level. Here are some steps to rebuild your score:

• Pay bills on time and set up automatic payments.

• Live within your budget.

• Register on the electoral roll

• Keep your credit utilization low.

• Keep old accounts open as they show a long credit history.

Step 8: Start an Emergency Fund

Finally, start setting aside an emergency fund for future troubles. If you lose your job or face new financial needs, an emergency fund will help prevent you from returning to debt. No matter how small your deposits are, saving an emergency fund as soon as possible helps you greatly in the future.