Budgeting to Avoid Bankruptcy

• If you aren't yet at the point of filing for bankruptcy, careful budgeting may be able to help you avoid the process and protect your credit history from the long-term damage bankruptcy will do to it. In particular, you need to make sure you'll have enough money each month to pay your required debt payments including credit card bills, car payments and mortgage bills.
  
  This is more difficult in the case of adjustable rate loans, which can rise suddenly and increase your monthly payment. But even with an adjustable rate mortgage or credit card, your loan agreement likely specifies how and when the lender can raise your rate. Loan agreements also specify the amount and due date of large balloon payments that complete a balloon loan, giving you time to save the money you'll need to meet your obligations in advance.
  
  

Budgeting During Bankruptcy

• Sometimes bankruptcy is the only option. When you file for Chapter 13 bankruptcy, one of the steps that you and your bankruptcy attorney must take is to draw up a proposal for a repayment plan that covers most, if not all, of your debts. This plan can last for three to five years, depending on your income and state laws. It will consist of a monthly payment or paycheck deduction that goes toward paying off your debt from multiple creditors. The plan should be something you can afford at your current wage in order for the court to approve it. Once approved, you'll enter repayment and need to live on a budget that covers your living expenses but also allows for your recurring debt payments.
  
  

Restrictions on New Borrowing

• One important provision of your bankruptcy budget is the fact that you won't be able to take on additional debt to meet your expenses. When you enter Chapter 13 repayment, the court will appoint a trustee from whom you will need permission to do anything from opening a new credit card account to buying a car with an auto loan. Depending on your repayment status and how much of your income goes toward your debt payment, the trustee can keep you from borrowing any more money, which means you'll need to find ways to meet all of your expenses with the money you earn.
  
  

Credit Repair

• Bankruptcy will always mean a long-term blemish on your credit report, whether you file Chapter 7 or Chapter 13. But this too is something you can manage with thoughtful budgeting. Once you exit your repayment plan, maintain your bankruptcy budget and put the money you would have paid on your debt into savings. You can use this money to get a secured credit card, which requires a cash deposit with the credit card company but allows you to rebuild your credit as you use the card for making regular, budgeted purchases such as groceries and utility bills. When your budget has allowed you to save up enough, you can use your savings as a down payment on a car. A large down payment will make it easier to get an auto loan, despite your bankruptcy history, and provide another chance to prove that you can borrow responsibly, thereby boosting your credit history.