Bankruptcy and Your Credit Rating

About Your Credit Rating

One of the most common misconceptions, and a favorite of creditors, is that your credit rating will be forever damaged after bankruptcy.  This doesn’t have to be the case.  For most people, wiping out poor payment histories and aging debt represents a new beginning.  If you’ve been struggling and juggling payments to make ends meet, your current credit score most likely reflects that, including late payments, high balances, collection accounts and charge-offs.  Extinguishing that kind of history through bankruptcy can cause an improvement to your pre-bankruptcy credit rating.  While it will, without doubt, impact your credit score, through bankruptcy you have the opportunity to create a fresh start and even acquire an enviable credit score with diligent financial management.

Fair Isaac, the agency that calculates your FICO score, has developed grading formulas that compare credit standings to others with similar financial situations.  So, if you file for bankruptcy, your FICO score is determined through comparison to others who have as well.  As you can see, this offers a much fairer comparison.

Myth:  You will never get credit again

The simple truth is that bankruptcy removes debt.  Less debt elevates you to a position to handle more credit. A minimized debt load makes your ability to pay more attractive to credit card companies, banks and other lenders.  In fact, you will probably start receiving credit card offers in the mail in a seemingly short period of time.  Of course, lenders will want higher interest rates and more money down at firts.  Doing things to ensure good marks on your credit rating, like paying your bills on time, start saving money and keep a steady job, your credit rating will climb over time.

Generally, if you are unable to re-establish a good credit rating in 2-4 years, its probably not because you filed bankruptcy.  In most cases, this outcome is because something else happened after filing bankruptcy.  Even in this elementary stage of you investigation, we will offer a word of caution about re-establishing debt in the process of re-establishing credit.  While they are sometimes mutually exclusive, effective management of debt accumulation is the best tool for creating enviable credit scores.

Myth:  Bankruptcy will destroy your credit for years

Without a doubt, bankruptcy will have an effect on your credit rating.  While we’ve explained how bankruptcy can have a positive impact on your credit rating, if the impact is negative, the chances are very good that it won’t cause that much of a drop.  A generalized statement would be that those individuals and families seeking relief through bankruptcy are already suffering deteriorating scores, which are likely to drop further without that relief.

Don’t confuse the fact that bankruptcy will be reported on your credit score for up to 10 years with the idea that it will have a continuous negative effect for that long.  And in the beginning, it is generally unlikely that you will have much credit to damage anyway.  Because of the FICO score process, you will have the opportunity to rebuild your credit score amongst a group of other individuals that have also filed bankruptcy.  So, really, future good credit is really up to you and how you manage debt, and less about the fact you’ve previously filed bankruptcy.

Bankruptcy and the Bad Credit Cycle

So, we’ve mentioned before that if your reviewing information about repairing bad or declining credit, you’re probably not the proud owner of a 750 credit score.  This is one of the most foundational reasons as to why bankruptcy is such a good option for so many Americans today.  You are probably aware that your credit rating affects everything from utility deposits to credit card and loan interest rates.  Doing nothing to reverse the cycle of credit decline will only cause the matter to worsen.  Federal bankruptcy laws are configured to stop the credit aging process of outstanding and delinquent debt once bankruptcy has been filed. Its always preferable to repay your debt as originally agreed, but sometimes that can’t happen.  In those situations, we are here to help.