Bankruptcy is about allowing a person a fresh start from his or her debts. It’s a solution many take when there is no other reasonable hope of being able to pay back all of their debts. There are many causes that lead people to filing bankruptcy – lost wages, emergency expenses, marital breakdown – but the first short-term goal after filing is the same for most people. Rebuilding their savings so they don’t have to turn to credit again when life throws them another curveball.
Savings Safer Than Credit
Most people would concede that building an emergency fund is fundamentally a good idea but for someone who is bankrupt it’s especially important because access to credit is gone once they declare bankruptcy, at least in the short term. That might sound scary, but it often turns out to be a good thing. Without a backstop of credit cards and payday loans, bankruptcy encourages people to reassess their finances and focus on balancing their day to day cash flow. And what many find is that access to credit is not the same as having savings. Having savings in the bank is a security blanket, relying on credit just leaves you exposed to more risk.
Now that we can agree that saving money over using credit is a good idea, let’s get back to the original question. Is it to possible save money during bankruptcy? My answer is yes.
Reduced Payments Helps Balance The Budget
If you are heavily indebted, consider what your budget looks like prior to filing bankruptcy. You may have been making minimum payments for months, if not years, minimum payments that add up to hundreds or even thousands of dollars. It might mean taking out new loans to keep up with all those bills, refinancing your home or even turning to payday loans.
After filing bankruptcy, you are no longer making debt payments. Instead, you have one monthly payment that is based on your income level. Most times, that one payment is less, sometimes substantially so, than the combination of all the monthly debt payments you were making before. Right away, your expenses are reduced.
Access to Credit Counselling Provides Savings Know-how
One of the other requirements of bankruptcy is to complete two credit counselling sessions. The objective is to help you learn to apply the principles of good money management and how to maintain a sustainable budget. My experience is that most people know what they need to do to balance their budget and start saving. The challenge before bankruptcy was that they couldn’t take corrective action because their debt payments were too high. With bankruptcy getting the debts under control, people are now able to get started on their savings plans.
Create a Savings Routine
With a combination of reduced expenses and professional advice, you are now able to build regular savings into your monthly financial routine as soon as your bankruptcy begins. Regular means having a set amount that you put into a separate account on a monthly or more frequent basis. My suggestion is always to use a separate savings account. That way, there is a sense of “out of sight, out of mind” and you are less likely to use those funds for something other than a true emergency or for whatever you are saving the money for. It is possible for example to begin to save a set amount each month as a down payment on your next car and even a home. You are much more likely to be able to regain access to large credit in the long term, if you have a good down payment.
Occasionally a bankrupt will find their budget tight even during their bankruptcy. This can happen if they are paying high surplus income payments or if they are paying an amount into their bankruptcy to buy back assets like RESPs. However even in these circumstance, you can still look forward to the period when your bankruptcy is over. At that point, your debts are gone and your bankruptcy payments are done. My advice to clients is to take what was your monthly bankruptcy payment and put that amount into a savings account instead. As a side note, a licensed insolvency trustee can talk to you about an alternative to bankruptcy if your monthly bankruptcy payments are high because of the reasons I outlined earlier. In those circumstances a consumer proposal can allow you to spread out those payments over a longer period, making it easier to balance your budget and begin building savings sooner. This is an option some people choose, others choose to file bankruptcy anyway.
Pre-bankruptcy versus Post-bankruptcy Assets
I’m often asked if there are rules about saving money while in bankruptcy, meaning is it even allowed. This concern is understandable since you are getting a fresh start from the debts and there are extensive rules about what assets you are allowed to keep. People worry if they are able to put money aside, the creditors might come after that savings. Any money you are able to save after you file for bankruptcy is yours. What you have to pay into your bankruptcy is based on what you own at the time you filed bankruptcy and a regulated, specified portion of what you earn. Anything you can save above those legislated payments is your money.
If your budget is balanced, saving is not only allowed, it’s encouraged. And the instances of people being able to save money during bankruptcy happens more often than you might think.