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Rebuilding After Foreclosure

Steps to Rebuilding

(Source Adapted from NeighborWorks and Freddie Mac)

Developing a budget and savings plan is critical to recovering quickly and getting back on your feet after a foreclosure or loss mitigation process. Your options may be constrained due to income or debt issues, credit history, and limited savings. The rebuilding process has several steps.

Step 1: Crisis Spending Plan

The first step is to create a “crisis spending plan” which will help you meet your immediate financial obligations. This should focus on “basic needs” priorities such as food, medical bills, housing expenses, utility payments, car loans, child support, and income tax debts. Apply for social service programs that can provide food, clothing, emergency housing vouchers and emergency utility vouchers to assist you during this transition process.

Step 2: Set Financial Goals

What are your top five challenges and top five assets, financial and behavioral? Envision your life next year, as well as three and five years ahead… This helps with goal setting and will move you beyond your immediate bleak situation. Decide whether to focus attention on saving, reducing debt or increasing income. These are fundamental elements of financial goal setting and planning. Assistance is available by reputable non-profit agencies and community services.

Step 3: Estimate Next Year’s Income and Expenses

Review the past year’s income and consider possible changes in the coming year. Next review debts and expenses. Consider how expenses will change given the new housing situation. Also, determine if the new housing situation has any impact on other costs, such as gas and day care. If necessary, fine tune expenses and create a livable spending plan.

Rebuilding after Foreclosure

Step 4: Analyze Current Financial Situation & Spending Habits

• Review and consider the total balance owing on each debt and the amount of payments due each month. List what changes you must make or want to make in the coming year concerting your debt load. This becomes your Action Plan.
  
• Review monthly expenses and discuss each item with family members. Rank your expenses from most important to least important. Then list what changes you believe you must make, and others you want to make. These are part of your Action Plan as well.
  
• The final step is Action Planning. Review any savings and investment goals and list ways they could be increased. Every little bit helps. Can you start saving change? Start saving $10/week in a safe place at home? Start saving by direct deposit $40/month?
  
• If you net any cash from the sale of your home, use these funds to support your rebuilding plan.
  

Step 5: Create a Rebuilding Plan

Once the crisis-spending plan has been implemented, tackle the negatives on your credit history and begin establishing good credit. The new spending plan should support payment of all monthly bills on time and allow you to start paying off past-due balances. Use the steps above to create a written plan that is clear and attainable.

Step 6: Changing Habits

It is time to comprehensively address your spending habits and money management decisions. Ask for help and guidance, research available resources for a workable, systematic approach to your finances. Resisting change and clinging to old habits will not move you forward. Financial freedom is a choice you make with each spending decision based on your new savings goals. As past due balances are paid in full and bills are paid on time, credit scores will increase. Pay off debt rather than regularly transferring debt to other cards. Apply for new credit only when strictly necessary.

CALL YOUR MORTGAGE COMPANY/SERVICER IF YOU KNOW YOU’LL BE LATE AND ALWAYS RETURN THEIR CALLS!!

Rebuilding After Foreclosure

A common stumbling point for many families is managing monthly bill paying habits, recordkeeping and periodic reviews. You may not have had successful methods of paying bills and tracking expenditures.

The following tips can be easily implemented into your new financial freedom plan:

1. Choose a specific area in your home to be the “office” area

2. For each pay period, use a notebook and jot down how the money was spent

3. Work out a bill payment and recordkeeping system that is convenient and easy to use. (Where will bills be put when they arrive, how will you keep track of online bill pay, where will you store and record bills due and paid, etc.?)

4. Each time bills are paid; enter the amount into your notebook. Keep labeled receipts and cancelled checks to help remember to enter other expenses.

5. Practice planning purchases. If you need to replace your vehicle or make some other major purchase, begin making “practice” payments to your savings account in that amount about 3-4 months before you buy. This builds up your savings and prepares you for the impact of the additional payment. Don’t just “say” you’re going to do it…actually commit to it and start saving those payments so you don’t end up taking on too much additional debt.

6. Near the end of every month, compare your written spending plan from Step 1 with the actual expense record in your notebook.

7. Don’t expect the plan and actual expenses to be exactly the same. Don’t be discouraged if it doesn’t go according to plan each month. Just identify the differences and discuss how you will handle extra expenses in the month to come.

8. Revise the spending plan, as necessary.

9. If overspending and excessive use of credit is an issue, think of a “tag” or “reminder” that might cause you to stop and think before you spend money on things that are not in your plan.

10. Keep your savings goals in a visual place. Write it down on a card placed behind your debit card, draw a picture and post it in several visible places in your home, keep talking about goals with your family so you can hold each other accountable when spending starts to get out of hand.

Step 7: Managing the Plan

A good plan is only as good as its implementation and maintenance. Realistically, you may not be able to correct all your credit and spending issues all at once. One-step at a time still achieves progress. A realistically achievable plan will be easier to maintain and therefore lead to more success.

The action plan should be broken into monthly goals. Review the rebuilding plan each month to assess progress and make any necessary changes. It might be helpful for you to meet with a trusted advisor or counselor once a month for the first several months and less frequently or as needed after that.

Finally, during rebuilding, it is CRITICAL to avoid the spending and lending traps of “fringe financial services.” There are many high-conveniences, but high-cost financial traps that take advantage of financially distressed families. By committing to a healthy financial rebuilding plan, you will be empowered to avoid alternative, costly services like payday rollover loans, back-to-back loans, and online payday loans. Establishing a good working relationship with a bank or credit union will help you avoid the high cost of check cashing outlets. Begin to develop modest savings to get your through emergencies so you can avoid high interest car title loans, overdraft loans, tax refund anticipation loans and rent-to-own merchandise.

CALL YOUR MORTGAGE COMPANY/SERVICER IF YOU KNOW YOU’LL BE LATE AND ALWAYS RETURN THEIR CALLS!!

Let’s work together!

Derek O’Toole

Helping Hands Solution AZ