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Bankruptcy Might Immediately Improve Your Credit


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3/7/2012
Tobias Licker, Esq.
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Many people fear that they will never again have good credit if they have to file for bankruptcy. While having a bankruptcy in your past has a very negative impact on your credit score, the overall results of discharging your other debts may actually increase your credit score despite the bankruptcy and position you toward good credit in the long-term. This article will address how bankruptcy may actually improve your credit score. 
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By the time most people have made the decision to file for bankruptcy, their credit scores are likely already very low. The fact is that people who are paying their bills on time and who have the money to pay them in full simply do not need to file bankruptcy. Depending on how many delinquent accounts a debtor has and how high the balance is on those accounts, their credit scores will reflect exactly how bad their position is financially. Thus, individuals considering bankruptcy already have low credit. Unless the debtor is expecting a financial windfall, bankruptcy may be the only way out of the debt cycle keeping their credit low.

Bankruptcy and Credit Reports

Filing for bankruptcy appears on credit reports and has a dramatic impact on overall credit scores. Depending on the reporting institution, it can lower credit scores anywhere from 100-200 points. Chapter 7 bankruptcies stay on credit reports for ten years from the date of discharge. Chapter 13 bankruptcies are reported for seven years after the date of filing. 

One common credit scoring service, Fair Isaac, which publishes the FICO score, divides consumers into ten groups to compare them to consumers in similar financial situations. That means that if you file bankruptcy, your FICO score will partially base your score on how you are doing compared to other bankruptcy filers. You won't be compared to those who have never filed bankruptcy and have perfect credit. This scoring system works to your advantage, despite the bankruptcy lingering on your credit report.

Credit After Bankruptcy

If you have filed for Chapter 7 bankruptcy, once the bankruptcy court grants a discharge, all of the debts that were included in the bankruptcy will reflect that fact on your credit report. That means that your debt to income ratio will improve, improving your score in that regard. Your late payment history on those accounts will diminish over time. Perhaps most beneficially, you will no longer have to try to make payments on the discharged debts, meaning that you can pay your remaining bills on time and in full to start establishing a positive payment history on your remaining accounts. 

If you have filed for Chapter 13, the debts that are included in your bankruptcy plan will reflect that fact on your credit reports. After completion of your plan, any debts remaining will also be discharged similar to a Chapter 7 bankruptcy. Before discharge, Chapter 13 plans are based on budgeting appropriately. With a manageable plan payment, you will be able to start paying your remaining debts on time and in full prior to discharge, putting you in a very positive position even before your debts are completely discharged.

If you are struggling with your bills, do not rule out filing bankruptcy solely because it will affect your credit. After all, the overall effect of filing bankruptcy may actually positively influence your credit long term. Bankruptcy is not appropriate or available for everyone, so it is important to speak with a qualified bankruptcy attorney to determine if bankruptcy is right for your situation.


Category: Bankruptcy


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