The Truth About How Bankruptcy Affects Your Credit Score

credit score

There are a lot of misconceptions regarding the impact bankruptcy may have on one’s credit score, which is why so many are often hesitant to opt for this choice. However, filing for bankruptcy is not the end of the world. Instead, it is an effective way for those who are struggling with debt to wipe the slate clean and build a better financial foundation.

Restoring Your Financial Health

For those considering the prospect of filing for bankruptcy, their top concern is their credit score. Most people get the wrong information and are surprised that the anticipated 12-month post-bankruptcy score goes up rather than down. That is why it is important to speak with a knowledgeable attorney as you navigate this complex process.

While all credit information – good, bad, and ugly – reported to the 3 major reporting agencies remains on the reports between 7 and 10 years, it does not mean that your score will go down. The truth is just the opposite. In most cases, the score goes up.

The reason behind this is two-fold:

  • By far the most important factor to a lender is the debt-to-income ratio. By discharging the debt in bankruptcy, the ratio is drastically improved. Therefore, if you are great at juggling your debts but have way too much of it in relation to your earnings, you are going to be a bad credit risk. If you remove the debt, you will be a much better bet. Most clients see a 100-point increase within 12 months of filing a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you have the added benefit of making monthly payments and are paying your creditors some or all of what you owe them over the course of your payment plan, establishing a good payment history that will add to your credit score.
  • You are not able to file another Chapter 7 for 8 years and the creditors are well aware of this fact. Following a Chapter 7, creditors will feel more (not less) secure. Accordingly, your score will improve.

Credit reports are like your report card at school – your average is what counts. That is why one "bad" mark does not substantially reduce your score. Think of it this way – if you are an A student and you receive one "F,” it makes you an A- student, not an F student. Credit is very much the same.

Although it may take a bit of time to rebuild your credit, it is not uncommon to start receiving credit card offers within 6 months of filing. Moreover, bankruptcy filers may have some fears or hesitation regarding credit card use, but obtaining a credit card is actually a great way to start putting “good” information on your credit report. Just make sure you pay your bill in full every month.

Schedule a Consultation with an Experienced Bankruptcy Attorney Today!

If you are planning to file for bankruptcy, the skilled legal team at Robert H. Solomon, PC can provide the advice and guidance you need to smoothly navigate your case. Backed by more than three decades of experience, you can rely on us to help you handle the challenges you may face.

Call our law office today at (516) 407-8199 to schedule a free initial consultation!