Why a Bankruptcy Might Actually Improve Your Credit Score
Posted on 12/05/2016 at 02:31 PM by Lisa Pendroy
If you’re considering bankruptcy, there are probably a lot of questions and concerns you have. Perhaps the most unsettling is the notion that after you file, your credit score will go down. Some even believe that their credit will be ruined forever and recovery efforts may take years to reflect on their credit score.
That isn’t always the case. In fact, I would even call this notion a borderline myth. In my work representing clients, I’ve found the opposite to be more often true. The large majority of my clients who file bankruptcy actually find themselves in a much better position financially after they have filed. Most of the time, their credit scores improve.
If you think about how a credit score is actually calculated, an improvement in your score should make logical sense. Credit analysts rely on a debt-to-income ratio as one of the main determining factors when calculating your credit score. Essentially, they look at the total debt accrued and compare it to your overall income. When you file for bankruptcy, your income does not change. Additionally, your debt is many times wiped clear.
Cease Reporting of Delinquencies
Most of the time, those who are considering the option of bankruptcy are doing so because they are substantially behind on their bills and cannot realistically pay them. When people are consistently paying bills late, or stop paying them completely, creditors will start reporting them as “delinquent” to the reporting agencies.
These delinquencies reflect poorly on your credit score and will remain a part of your credit history for years to come. The longer debts are left unpaid, the more ‘delinquency’ strikes against your credit you will receive, and the only way to remove them is to ensure no delinquencies are reported for an extended period of time. Filing for bankruptcy ceases reporting of delinquencies, and the sooner this happens, the sooner you can begin the countdown to when your pre-bankruptcy strikes will disappear from your credit history.
Opportunities to Build up Stellar Credit
Contrary to popular belief, you can obtain credit after a bankruptcy. As you might expect, this can work for or against you. After a bankruptcy has been completed, creditors are aware that you now have a clean slate. They also know that that you will not be able to file another bankruptcy again for several years. For this reason, credit card companies are all too eager to offer you credit cards again.
However, you can play this game to your advantage; accept small credit offerings and responsibly build your credit back up over time. Just remember to tread carefully; credit card companies tend to increase your credit limit as your credit score grows, so make sure that they set a credit limit that you are comfortable with.
Also, if you have a mortgage and/or car payments this too will help build up your credit score after filing for bankruptcy.