I recently meet with an individual considering personal bankruptcy who was under the impression that as a bankruptcy trustee I would tell them how they could spend their money. I did a double take and told her, “No. No-one has the right to tell you how to manage your money.” I assumed she was worried that she might be put on an allowance and told what she could and could not buy and that scared her.
Boy, was I wrong. Turns out she was hoping that we would put her on a strict budget and tell her how much to spend each month. She knew she had a problem with spending and was counting on us to solve it for her.
We can’t, but we can help.
Bankruptcy And Budgeting
One of the most common reasons people get into financial trouble isn’t that they spend too much, although that can be a problem too, its that they don’t keep track of how much they have spent and so they don’t know when they are over their limit. This problem is compounded by people that use credit cards and cash to make purchases. If you are going to use a credit card then you need to leave your money in the bank so you can pay the bill at the end of the month. If you have spent your paycheque already this month, then you should not use a credit card because you won’t have any money to pay the bill at the end of the month.
So, how does a bankruptcy help you manage you money better? The answer comes in two parts:
- You eliminate unsecured debt payments that are using up a significant portion of your monthly budget before you even begin to pay for daily living costs.
- During your bankruptcy track what you are spending your money on. You do submit income and expense statements as part of the bankruptcy process however this is to calculate potential surplus income, not to tell how to spend. But you can use this process to your advantage.
Step 1: Eliminate Debt Payments
When you file for bankruptcy or a consumer proposal you immediately receive relief from your debts. As soon as you file you stop making payments on your credit cards, overdrafts, lines of credit, overdue income taxes, etc., etc., etc. Your access to credit is cancelled and that forces you to begin paying for things with cash going forward. That’s half the battle won. You can only spend the cash you have.
Step 2: Track Your Spending
The second step in debt recovery is to begin tracking where your money goes each month. This sounds complicated, but it isn’t. All you need to do is write down every dollar that you spend when you spend it. What we’ve found is that by asking people to write down every dollar that they spend they stop to think about each and every item in their budget, and sometimes they decide it’s an expense they can do without.
At the end of a week you can take your spending notes and sort them into groups – food, car, kids – whatever makes sense to you. After a couple of weeks you may see a pattern – you always spend $150 on groceries on Tuesday, then run out for milk and bread on Friday and spend another $30. Knowing this means you can decide if you want to change the pattern, which really means changing how you spend your money.
So, a bankruptcy trustee does not (cannot) tell you how to spend your money. If you want to spend $500 a month on red licorice your trustee can’t stop you. What they can do is force you to pay in cash and encourage you to keep a record of how your money is spent. The simple act of writing down all of your purchases may lead you to spend your money differently in the future.