Foreclosed, Bankrupt, Broke: How to Rebuild Your Finances From Scratch

Major financial setbacks such as foreclosure and bankruptcy can send people reeling. However, hitting rock bottom financially is also a powerful place to begin anew. The time after foreclosure and bankruptcy is a valuable opportunity to completely rebuild your relationship with money and finances. After all, you can only go up from here.

From living without credit to talking about financial setbacks with employers and landlords, we have a few tips to help you regain your financial health. Although the experience of losing one’s home or declaring bankruptcy isn’t easy, your finances will eventually bounce back. Whether you couldn’t pay your mortgage payment and lost your home, or had to declare bankruptcy because of inescapable debt, these tips will help you get on the road to recovery:

Your New Life Without Credit

If you’ve filed for bankruptcy or gone through a foreclosure, it’s very likely that you’re behind on multiple accounts, your credit score has been severely impacted and your access to credit halted. Luckily, you’ll still have resources at hand: chiefly, your income.

The key to surviving a financial setback is to live below your means, so living without credit can be a blessing in disguise. As there will may be a period where credit will not be available, use this time to create a cash budget where you pay for everything with what you already have in cold hard dollars.

Even after bankruptcy or foreclosure, credit card offers will start to come in about 18-24 months. Use your credit cards wisely. Be careful of the APR, as many of the cards will have high interest rates because lenders will be wary of your history. Use the credit cards for small purchases to build your credit, and be sure to pay off the balance in full every month.

Developing Good Financial Habits

The most important thing you can do after bankruptcy or foreclosure is to develop good financial habits. Not only will they help you regain control, lenders will want to see proof of your good habits before lending again.

Start right away by building an emergency fund of six months’ worth of expenses. This creates a buffer that will keep you from sliding back into the circumstances that led to bankruptcy or foreclosure. If that seems overwhelming, set yourself the goal of $1,000 in the emergency fund to get the ball rolling.

Next, make it a habit to pay bills on time. If the bill is due on the 1st of the month, pay it a week before. That way, you’ll never get behind on bills, and your credit score will steadily increase over time. If you still have some type of debt that you’re working to pay off, it’s important to stay current so you can rebuild your credit. Even student loans can hurt your credit score if you make late payments. As you go about repairing your finances, keep learning about different financial products, like how mortgage interest works, how credit card fees can be avoided, etc.

How to Talk About Financial Setbacks

Many struggle wit the emotional impact of bankruptcy or foreclosure. Walking away from debts or losing one’s home induces intense feelings of shame and guilt. But it’s not the end of the world. You don’t need to punish yourself over and over again.

One challenge people face is talking to employers on job interviews or potential landlords, especially when a bankruptcy or foreclosure comes out in a credit or background check. The best way to talk about these situations is to own it and outline how you have learned and improved since.

For example, if your situation came from circumstances beyond your control, such as medical bills, be sure to mention it. Create a narrative: “These were the circumstances that led to bankruptcy or foreclosure, but now I’ve created a budget and saved X percentage of my money and improved my credit score by X amount of points through diligent work.” By facing up to the circumstances, you’ll be able to own the story.

Although a major financial setback feels overwhelming, you will recover. While it will certainly be challenging, you can reframe your financial setback so it becomes a story of facing adversity and developing strong financial habits.

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