Bankruptcy provides a fresh financial start and the opportunity to rebuild your life without a huge amount of debt hanging over your head. However, far too many people resume their old spending habits after declaring bankruptcy instead of learning from their mistakes. Don’t fall into this trap. Instead, figure out what you did wrong and look for ways to improve.
If you’re ready to bounce back after your business bankruptcy and live a secure financial life, use the three tips listed in this article to take action.
Create an Insolvency Worksheet
After declaring bankruptcy, create an insolvency worksheet — a document that establishes the degree of a company’s insolvency as it pertains to bankruptcy. An insolvency worksheet lists liabilities and assets: for a company to be considered insolvent, the market value of its liabilities must be more than the market value of its assets.
Insolvency worksheets are important because if the amount of insolvency was equal to or more than the amount of debt that was canceled in bankruptcy, you can omit the debt cancellation from your income tax return. If the amount of insolvency was less than the amount of debt canceled, you must report it as income.
Develop a Strategy to Rebuild Your Credit
Don’t rush to get a new credit card or take out a loan; it’s a myth that you can’t get credit after declaring bankruptcy. In fact, some creditors have no problem giving you a loan since you now have more money than you had before bankruptcy, but you’ll probably end up paying an exorbitant amount of interest.
Consider applying for a secured credit card, a type of card designed for people with bad credit. Secured credit cards typically require a deposit of around $250 before you can use them. They’re useful in rebuilding credit, but note that these types of cards have high interest rates and fees.
Establish a Budget and Follow It
Make a budget by determining your income and calculating your expenses. Set savings goals and track your progress. Make your lifestyle fit your budget. In other words, don’t purchase anything you can’t buy with cash. Take a hard look at recurring expenses; this is an area that can quickly drain your bank account. An expensive cell phone or cable bill may be out of your reach until you’re back on solid financial ground.
Reassess your budget often, especially in the weeks and months following your bankruptcy declaration. If your income dips, adjust your budget immediately. However, if your income grows, use it to bulk up your emergency fund instead of spending the additional money.
Take advantage of the fresh start that bankruptcy provides by avoiding accumulating debt again. Create an insolvency worksheet so you don’t pay too much money to the IRS. Then, establish a budget, follow it, and develop a strategy to rebuild your credit. Don’t rush; it’s easy to accumulate debt but hard to get out it. Rushing to resume your former lifestyle may put you in the same place you were in before declaring bankruptcy.
