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Smart Budgeting Tips for Homeowners on the Brink of Bankruptcy

By Thomas O'Shaughnessy | March 19, 2024

Owning a home has always been one of the best ways to build wealth. But in today’s unpredictable economy, it’s easy even for homeowners to find themselves on the brink of bankruptcy. According to the most recent numbers, bankruptcies rose 10% last year

But don’t lose hope. Being on the brink of bankruptcy isn’t the same thing as actually being bankrupt — not even close. Getting your financial situation under control and avoiding bankruptcy doesn’t take Elon Musk-level wealth. All it takes is a little discipline and common sense. 

Forget what you think you know 

One of the most fundamental financial mistakes that homeowners make is underestimating how much it actually costs to own their home.

A lot of people, when assessing how much home they can afford, basically just estimate their future mortgage and utilities. After all, if you’re renting, all you usually have to pay is rent and utilities. But this can leave out a lot of other expenses, like property taxes, mortgage insurance (if it’s required), home insurance, maintenance, and landscaping. A year into actually owning a home, you may find that you’re paying twice as much as you thought you’d be paying.

Before you buy a home, conduct a careful, detailed inventory of your future home expenses, and minimize your upfront costs with measures like using a discount real estate broker. And once you’re in your new home, keep track of how much money you’re actually putting toward your home, so you’ll have an accurate portrait of your financial obligations. In many cases, you’ll be in for a big surprise.

Know your variable homeowner expenses from your fixed homeowner expenses

Once you’ve assessed all your actual expenses, it’s time to separate them into fixed and variable costs.

Fixed costs are costs that you can’t bring down. Your mortgage and car payments, for example, aren’t negotiable. You might be able to comparison shop your way into lower real estate commission, but your mortgage is basically set in stone, aside from minor changes in your interest rate with potential refinancing. Your property taxes are also unlikely to ever decrease.

Variable costs include expenses like gas, groceries, landscaping, and maintenance, or use-based expenses like your utilities. You’ll want to bring these expenses down as much as possible. 

If gas is a major expense, try to minimize unnecessary driving, and take public transportation when possible. If you spend a lot on groceries, seek out coupons, try more affordable grocery chains, or cut unnecessary items from your grocery list.

To bring down the cost of utilities, consider installing a programmable thermostat to tightly regulate your heating and cooling, or simply instituting a strict “energy saving” policy of turning off any unnecessary lights, reducing water usage, and unplugging any appliances that you don’t use. Strategies like this can often bring your utility bills down by half or more.

Expenses like phone bills, maintenance, or insurance premiums can also be variable costs if you’re able to downgrade your plans, cancel your service, or negotiate better rates. If you’re spending a lot on maintenance or landscaping, ask yourself if you can reduce the frequency of those services, or eliminate them — at least until you get your financial situation under control. 

Follow a real budget — don’t "guesstimate"

When you make your budget, create a full, on-paper budget. Don’t “guesstimate” your expenses — that kind of thinking probably contributed to your current financial predicament. Putting your budget on paper will solidify your commitment, and is an easy way to hold yourself accountable. 

Two popular budgeting systems to consider are the envelope system and the 50/30/20 system. 

The envelope system is a cash-only system where you put money for each of your necessary monthly costs — like mortgage, groceries, gas, etc. — into its own labeled envelope. Any money left goes toward paying down debts or toward savings. Once you exhaust the money in each envelope, you’re all done spending on that category for the month. This system is especially useful if you tend to overcharge on credit cards. 

The 50/30/20 system puts 50% of your income toward necessary expenses, 30% toward optional expenses, and 20% into paying down debt or building savings. If you find that you don’t have enough income for these allocations to cover your expenses, consider taking on a couple of easy side gigs to make more money. 

Whichever system you use, make sure you “name” every dollar. Having unallocated income to spend can undermine your financial discipline, and lead to a collapse of your budget — possibly leading to bankruptcy.

Remove temptations

The hard part about budgeting isn’t making the budget. That’s a relatively simple matter that takes pen, paper, and some elementary arithmetic. The hard part of budgeting is actually sticking to your budget.

That’s why it’s essential that you make it as easy on yourself as possible. Remove as many temptations and distractions from your life as you can. Unsubscribe from email promotions, cancel as many of your credit cards as you can, delete shopping apps, and block websites where you tend to waste the most money. Consider paying for everything with cash, so you actually feel the money leaving your hands when you buy something. 

Adopt a simple, one-day-at-a-time approach to your spending, and you’ll have a much better chance of sticking to your budget. 

Understand exactly what you’re facing 

For homeowners staring down a potential bankruptcy, a certain amount of dread and stress is normal. But this anxiety is often exacerbated by uncertainty about what lies on the other side of bankruptcy — a refusal to face up to facts that is often closely related to the behavior that got them into financial distress in the first place. 

The good news is that things probably aren’t as bad as you think. Bankruptcy will likely relieve most of your debts, but it probably won’t leave you homeless. Chapter 13, one of the two main types of bankruptcy, is explicitly designed to help debtors keep their homes. 

If you do end up declaring bankruptcy, look for a good bankruptcy lawyer to guide you through the process in the same way you’d find a good real estate agent — ask friends and family for referrals, look at online reviews, and meet for a consultation before you commit.

Facing down the worst case scenario, and realizing that it’s not nearly as bad as you feared, can often have a liberating effect — and might give you the emotional boost necessary for you to revamp your money habits before it’s too late. 

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