Bankruptcy: Why Timing is Crucial to Get a True Fresh Start

I talk with people all the time who want to file bankruptcy when they don’t have enough money to support their families, even without debt payments. They may be unemployed and looking for work, only working part-time, or face huge costs in their household budget they really can’t afford. Why is this a problem, you may ask? The purpose of filing bankruptcy is to relieve the debtor (the person filing bankruptcy) of debt obligations, or modify debt payments, for a “fresh start” financially. While the bankruptcy court can deal with your debts and creditors, it cannot make your budget work for you.

Create your budget

It’s important to know what you’re spending compared to how much income you have. At LSS, bankruptcy counselors focus on putting together an accurate and complete budget for your household. This is to make sure you can afford all your household expenses after filing bankruptcy. This will help you to both regain and maintain financial stability going forward. So, what exactly is a “balanced budget?” It simply means you have enough money to pay all your bills every month. A balanced budget will result in a true fresh start.

Budget for emergencies

I always encourage people to budget for emergency savings so they don’t have to turn to credit when things go wrong. Life is full of surprises - some good, some not so good. By having an emergency fund, you will be more prepared when a surprise of any kind comes along. More importantly, you can help avoid new debt from using credit because you have cash on hand.

What if the budget doesn’t balance?

If your budget is short each month, meaning you don’t have enough income to pay all the bills, you should look at areas to cut costs. If reducing spending alone will not work, you will likely need to find more income to increase monthly cash flow. This may involve finding an extra job, donating blood, renting out a room in your home, or selling assets. As a Bankruptcy Counselor, when I make these suggestions, I am not trying to tell you what to do or how to spend your money. I just want you to get the most benefit from filing bankruptcy, and be able to stay out of trouble down the road, financially speaking. These ideas may not work for everyone, but don’t let that stop you! Think about ways you can make your budget balance so bankruptcy is not just a temporary Band-Aid, but instead a positive solution with lifelong results.

Why would the attorney use a different budget?

Please keep in mind that if you do file for bankruptcy protection, the budget your attorney files with the court may be different than the budget you create or the one your counselor compiles with you. Our budget is designed to document actual spending for your household, while your attorney’s budget may show how much the average household of your size spends each month. It’s not that one budget is right and the other is wrong. It’s just that the two budgets serve different purposes. So, unless you and your attorney put together a budget based on what you really spend, please don’t use the attorney’s figures to determine what you are really spending. Without accurate numbers, you will never know if you are positioned for a fresh start after bankruptcy.

When should someone file bankruptcy?

The best time to file is when you have all your financial ducks in a row. However, some people may not have the luxury of waiting to file bankruptcy until that happens. They may be facing a sheriff’s sale because their home is in foreclosure. Or, their wages may be lower because they are being garnished (when a creditor takes a percentage of their after-tax income for a debt owed). Garnishments often result in the inability to pay all bills. But even during a crisis, LSS counselors likely will have ideas to help you through this challenging time. "So when should I file bankruptcy?"  Because bankruptcy has long-term consequences and sometimes there isn't a simple answer to this question, it is better to get advice from an unbiased, knowledgeable source. Financial Counselors at LSS can help talk this through with you for free.

Plan and take action

To avoid getting back into debt after bankruptcy, you have to take action before and after filing. To sum it all up:

• create your budget and stick to it as much as you can;
• reduce spending if needed (and where possible);
• determine if you need more income and the best way(s) to do so;
• and last but not least, create an emergency fund.

If you can do this, you will have a true fresh start from bankruptcy...along with financial stability that we all want. Should you file bankruptcy? Are you looking for options to deal with your debts without filing bankruptcy?  Call LSS at 888.577.2227 and your Financial Counselor will provide you with all realistic options and help you take action. We also offer online financial counseling. It’s free, confidential, and just as effective as phone or in-person counseling…and it’s only a click away!

NOTE: The above information is not legal advice. If you're looking for legal advice, consult with a reputable bankruptcy attorney near you.