How Will Bankruptcy Affect My Credit Rating?

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How Will Bankruptcy Affect My Credit Rating?

If you are considering a bankruptcy due to non-payment on debts, this is probably a moot point. In most cases people considering bankruptcy already have poor credit and bankruptcy will actually help improve your credit.

To begin with, you must understand what your credit score is and why you need it. In reality your credit rating is used for three things – to buy a house, to buy a car, and to get more credit.

Sometimes used for your job or a character assessment, the main purpose of credit is to predict how likely/able you are to pay your debts. A credit score is primarily based on a statistical analysis of your credit report, typically from the three major credit bureaus: Equifax, Experian, andTransUnion.

The Fair Isaac Corporation, known asFICO, created the first credit scoring system, and continues to be the standard for credit scoring today.

So what helps and hurts your credit?

Buying things with credit cards or loans and paying them timely builds credit worthiness. However, once you start paying late, have too high a debt to income ratio, have too many open accounts, or stop paying entirely, these all become negative events that are reported to the three credit bureaus and bring your credit score down.

Why does low credit matter?

Because once your credit card companies see these negative reports (whether for a card you hold with them or with someone else) they see you as being a risk. Once you have become a risk you potentially violate the terms of your contract and they can cut your spending limit, suspend your account, or increase your interest rate, even if you are current and in good standing with them.

Will bankruptcy make my credit score go down?

What you really need to know is yes bankruptcy will cause your credit score to go down, possibly as much as 200 points. Yes bankruptcy stays on your credit report for 10 years when other reported events stay on for 7 years. However, once you file bankruptcy and there is no longer any negative reporting (late payments, charge-offs, open and unpaid accounts) you can immediately start rebuilding your credit.

This means if you still have a mortgage, pay it on time. If you have car payments pay them in full on time. Your post-filing credit behavior will do more to help or harm your credit than filing the bankruptcy will.

For example, if you file bankruptcy and are still unable to pay monthly bills, car loans, or house payments on time, the negative reporting will just continue and your credit score will stay low. However, if you make these remaining payments timely you will see your score increase, in some cases dramatically. For those with bad credit at the time of filing, increases of as much as 100 to 120 points in a year.

Most importantly, you will get credit again. You may be able to get a home loan again in 3 to 4 years and a car loan even sooner. The reality is, right after your discharge you are a better credit risk than before filing because you have no unsecured debt and can’t file again for 8 years and the creditors know it. It is common for debtors to receive credit card applications within weeks after receiving their discharge. Of course these will have a low limit, high interest rate, and it’s a bad idea to start bad credit card habits all over again.

Linda S. Klinger, Esq. had a career in publishing before obtaining her law degree. Upon graduating law school Linda practiced civil litigation and intellectual property law. However, as many first year attorneys can attest, the long hours and lack of pay created undue personal hardships similar to many of her current clients. At that time, Linda decided that she would use her education to help people and give back to the community. By taking a direct, one on one approach with people, Linda has helped provide a fresh start to countless families that have become her clients.
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