Budgeting After Bankruptcy: Step #3 – Create A Balanced Budget

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Step #3: Create a Balanced Budget

So far we have discussed the importance of getting accurate information for determining your income by reviewing at least the last several months of paystubs and we have discussed the incredibly important task of getting a “financially honest” expense report. The next step in putting together a successful budget after filing bankruptcy is putting it all together to create a balanced budget.

Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

Pad and Paper IconPositive Cash Flow

The first thing to look at is whether or not you have a surplus of money or if you are “in the red” and have a negative amount of money left over each month. If you have extra money left over each month then that is a good problem to have. I would encourage you to look back over your expenses and make sure that you are using realistic numbers. If you have a budget based on realistic expenses, then have you begun to put money aside in an emergency fund? Retirement? Saving for your children’s education? There is a long list of things that you can always be putting your surplus money towards. Doing so ensures that you become financially stable and secure.

Negative Cash Flow

If you have a negative amount of money then tough decisions are ahead. If you are in the red then you have two choices – you can increase your income or decrease your expenses. Unfortunately, your ability to increase your income is most likely limited. Therefore, look to your expenses. Some of the most common money pits for people are food and entertainment. Look to see if you are eating out too much. Or maybe you’re going to see too many movies? (It’s insane what it costs to go see a non-matinee movie nowadays!) Start chipping away at your expenses until you have a positive cash flow each month.

The “Balanced” Budget

The core of this blog post is to have a “balanced” budget. That term has a couple different meanings. First, we want your budget to be balanced in the sense that we want your income to be greater than your expenses. We hope you will have a positive cash flow.

Also, we want your budget to be balanced in the sense that you shouldn’t cut everything out of your budget that isn’t a necessity. Instead, you need to go to the movies every once in a while. It’s important that you go out to dinner. Your kids should be involved with athletics. Your budget is going to mirror your lifestyle. You can have a huge cash flow each month but if you are miserable because you don’t have any extracurricular activities then you will quickly burnout and abandon your budget. In other words, have a life! On the other hand, if you plan for these extracurricular events but ensure that you do so within your budget then you are more likely to lead a more balanced life, which will greatly increase your chances of following your budget.

Budgeting After Bankruptcy: Step #2 – Know Your Monthly Expenses

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Budget After Bankruptcy | Know Your ExpensesIn our last blog post we talked about the first step of budgeting after filing for bankruptcy, which was knowing your income. I mentioned in that post that I believed determining your income was the easiest of the five steps in building your budget. Unfortunately, I think the second step, knowing your expenses, is the most difficult step of building your budget post-bankruptcy.

Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

“Financial Honesty”

In building a budget I believe the most important quality is “financial honesty”. So what exactly does that mean? Financial honesty is the ability to honestly look at your expenses and determine what can go and what can’t go.

For example, it’s easy for me to say that I spend $400 a month for food on a family of four. That’s $100 a week at the grocery store and should suffice, right? Probably not. If you budget only $400 a month in food you are setting yourself up for failure. Think about this – that means you spend $1.11 per person per meal. That’s too low. You might be able to make that work for a month – maybe even two, but it’s not a long term, feasible budget for food. The point is, you have to be realistic, or financially honest, with your budget.

There are a couple different ways people can get an idea of their expenses. One way would be to simply carry around a small pad of paper and a pen or pencil to write down your expenses. Write down everything! Literally, everything! Do this for at least one month but ideally you would do this for two or three months. Using this pad and paper you can then go through and add up your different expenses. Categorize your expenses and get your total monthly expenses for each category.

Another way to accomplish the same task is to look at your bank statements. If you are like me and put everything on a debit card then you can easily look back at your statement and categorize your different expenses. However, watch out for cash withdrawals. Unless you write down what you are spending cash on you won’t have an accurate budget that shows what you are spending money on.

Fixed Expenses vs. Variable Expenses

Typically, expenses can be classified into one of two categories. Expenses will either be fixed or they will be variable. Fixed expenses that will remain the same from month to month. Think of your mortgage payment (as long as you don’t have an adjustable rate mortgage), car payments and insurance. On the other hand, variable expenses are exactly what they sound like – they are variable. They change from month to month. Examples of variable expenses include the electric bill (big difference in winter and summer), gas for your vehicle, food and most other expenses.

Your fixed expenses are pretty much set. You can’t do a whole lot to lower those payments each month. However, variable expenses are what can make or break your budget. Knowing your variable expenses is at the core of a good budget.

Hidden Traps of Expenses

I’ve already mentioned one of the biggest hidden traps for budgeting and that is your food. Make sure you track your food budget for a couple months to get an accurate estimate of what you are spending. Other trouble areas we have seen after doing thousands of bankruptcies are things like car repairs and taxes. Let me elaborate.

After tracking down your expenses using your pad of paper and pen or pencil or by using your bank statements if you use a debit card you should have a pretty good idea of what you are spending each month. You may be confident that you spend no more than $200 a month on gas. You’ve tracked the last two months and each month you’ve spent about $190. However, what about oil changes? Tire changes? Other repairs and maintenance to your car? If you don’t budget your transportation expenses a little higher then you won’t have the money set aside for these types of expenses.

Similarly, we have seen a lot of clients who have come in who are self employed. Problem is, they haven’t set aside taxes each month. When tax season rolls around, they are hammered with a tax bill and have no money to pay it. If you are self-employed, a contract worker, or if you receive a 1099, then be sure to set aside anywhere between 20 – 30% of your income for taxes. If you don’t do this then you have dug yourself into a hole that will be tough to get out of. Remember…death and taxes are always certain!

There are certainly other areas that people often overlook when building their budget. It is critically important to track your expenses and look closely at your monthly expenses. After doing this, begin a draft of your budget. Remember, above all else, you have to have financial honesty. The goal is to live below your means and set aside money for emergency situations and savings.

Budgeting After Bankruptcy: Step #1 – Know Your Monthly Income

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North Carolina FlagAs a bankruptcy law firm we have filed thousands of bankruptcies for people all across North Carolina. During our years of experience we have seen almost every scenario you can imagine that would lead to someone having to file bankruptcy – whether it is a sudden illness with unexpected medial expenses, loss of a job, divorce, climbing interest rates on credit cards, repossession of a vehicle or the foreclosure of a house.

There are, without a doubt, times where bankruptcy is unavoidable. However, we most regularly see situations where the road that led to bankruptcy was a gradual process. It was a slow financial leak instead of sudden break of the financial dam. In order to ensure that our clients make bankruptcy a once in a lifetime event, we work hard with them to ensure that their post bankruptcy life is one that is financially balanced and as stress free as possible.

The number one way to ensure that your financial life is balanced and less stressful is by creating a monthly budget. Believe me, I know this isn’t easy. I know it takes time and is more stressful than not knowing the reality on the front end. However, creating a monthly budget will help you avoid the financial pitfalls that have led to bankruptcy.

So, with that said, here are five easy to follow steps to create a budget.

Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

Step #1: Determine Your Average Monthly Income
Out of the five steps necessary to create a truly workable budget this is probably the easiest. In order to know what you can spend each month you have to know what you are making. What we have found to be the easiest way to do this is to get at least your last six months of paystubs or profit and loss statements. Using these paystubs or profit and loss statements you can get an accurate idea of what your net income is each month.

Can this be done even more easily? Of course it can. However, I fear simply using one month may not be as accurate as necessary. If you are paid every two weeks there will be some months where you are paid three times. If you are paid every week then you will be paid five times in a month periodically. Regardless, a six-month sample allows you to get a pretty accurate estimate of what you are actually bringing home each month.

Another area to closely watch when determining your income is bonuses and overtime. If you get an annual bonus and it happens to be in the six-month period you are looking at then it could overstate your income. Same thing with overtime, if you have seasonal overtime be careful not to overstate your income annually by only looking at your “peak” period.

Failing to spot irregular income such as bonuses or overtime may inflate your income, which will cause your budget to be inaccurate and destined for trouble from the beginning.

Determining your income is, without a doubt, incredibly important. However, in my opinion, the most important step of the five-step process to creating a budget is the second step. If you are unable to accurately determine your monthly expenses, then your budget is worthless.

Do I Still Have to Make Mortgage Payments While I’m in Bankruptcy?

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Once you decide to file Bankruptcy, whether it is a Chapter 7 bankruptcy or Chapter 13 bankruptcy, you will need to decide if you intend on keeping your home.  If you qualify for a Chapter 7 bankruptcy filing and you wish to keep your home, you will need to be current with your mortgage payment(s) and your homeowners’ association dues at the time of filing.  As per federal bankruptcy law, you must remain current throughout the duration of the bankruptcy; this includes first, second, third mortgages attached to the home, as well as, your homeowner’s association dues.  If you fail to keep current with your mortgage payment(s) or your homeowners’ association dues, the “relief from stay” can and most likely will be lifted and the mortgage company or the homeowner’s association may initiate foreclosure proceedings on the home.

Family in Front of House

In a Chapter 13 bankruptcy filing, you will make monthly payments to the Trustee’s office.  The Trustee will then distribute those funds to your creditors.  The creditor payments are according to priority deemed by the Bankruptcy Court.  Your mortgage lender is almost always one of the creditors at the top of the list.  Therefore, you will not be making direct payment to your mortgage lender if you are behind on payments.  This payment will be included in your Chapter 13 payment plan and the Trustee’s office will make the mortgage payment from the funds you send each month.   An exception would be your homeowners’ association dues, which you will continue to make payment directly to the homeowners’ association.  Also, in some districts if you are current on your mortgage payment the Trustee will allow you to make direct mortgage payments to the mortgage company.

Regardless of which type of bankruptcy you plan to file, if you want to keep your house you will need to continue to make your mortgage payments and stay current on your payments.

Will My Payments Change in a Chapter 13 Bankruptcy If I Lose My Job?

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Who Will Find Out That I Filed Bankruptcy?

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A lot of people are concerned with who will find out about their bankruptcy if they choose to file bankruptcy. That is a legitimate and understandable concern. Once a bankruptcy petition has been filed with the court it becomes public record.  If a person is determined enough, the information can be obtained.  However, to find out if someone has filed for bankruptcy the person would need to sign up for an account on PACER (Public Access to Court Electronic Records) and could be required to pay money to view the necessary information. For the most part, the only people that will be notified of the bankruptcy are the people that you are in debt with and/or owe money too.

Family Walking Holding Hands

Understandably, the main concern for people is family and friends finding out about their bankruptcy.  The only way that they will be notified of your bankruptcy is if you owe money to them.  They will have to be notified under federal law as creditor.  Also, if you are paying child support and/or alimony the recipient will have to be notified of your bankruptcy.  The reason for this is if you were to fall behind on a payment with child support and/or alimony then that could affect the outcome of your bankruptcy.

Another concern that clients have is if their employer will be notified.  They payroll department of your employer will likely be notified in a Chapter 13 bankruptcy because at least a portion of your monthly payment will be deducted from your paycheck. In a Chapter 7 bankruptcy there is no reason the employer would find out about the bankruptcy unless they pulled your credit report.

Again, it is rare that people would be able to find out if you have filed bankruptcy. Unless you choose to tell people about your bankruptcy, most people will never find out.

What If I Stop Receiving Mortgage or Car Statements After Filing for Bankruptcy?

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Once you file a bankruptcy, an automatic stay goes into effect.  This automatic stay states that no creditor can try to collect any debt from you; according to statute 11 U.S.C § 362 (6), “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title”.   If a creditor does contact you with payment demands, a Charlotte bankruptcy lawyer or Greensboro bankruptcy lawyer can file what’s known as a “motion for sanctions” which reprimands the creditors attempting to collect the debt.

Bills in Mailbox

Even though you are current, and are going to keep your house or car; many creditors will still not send you a bill once you have filed the bankruptcy.  Ever heard the phrase, “better safe than sorry”?  Well, this is exactly why you are not receiving your statements now; they do not in any way want to violate the automatic stay.  If you had set up automatic bill pay, this will likely stop as well.  You just have to remember regardless of whether you receive a bill, you must continue to make your house or car payment!  If not, the creditors have the legal right to foreclose on your home or repossess your vehicle.

What can you do?  Simply call them and request that they still continue to send you your statements.  They may send something to your bankruptcy attorney asking for he/she to sign off to give permission for you to resume receiving statements for their records, but in most cases, it is as simple as that.  Again, the main reason a creditor stops sending you statements is because they do not want those statements to be viewed as an effort to collect a debt which would violate the automatic stay that goes into effect when your bankruptcy is filed.