Bankruptcy and Your Credit Score

Fresh StartFor many people the best way to improve a credit score is to file bankruptcy.  This may sound counterintuitive, but it is true.  If you are struggling with credit card debt that you can’t afford to pay then you probably already have poor credit.  However, after filing bankruptcy you are no longer liable directly to those creditors for payments.  As a result, the unsecured creditors listed on your credit report stop reporting late and missed payments each month.  Since you don’t have to pay your credit cards anymore you probably have more money to make sure you pay your other bills on time, like your utilities, mortgage, car payment, and insurance premiums.  Paying these creditors timely allows you to establish a positive payment history which improves your credit score.

A credit report is simply a long list of notations about your financial history.  Filing bankruptcy is one notation on a credit report out of possibly hundreds.  Yes, that bankruptcy notation does hurt your credit score temporarily, but most of the clients I have spoken with about this issue report seeing their credit score go up fifty to one hundred points the first year after filing bankruptcy.

Also consider how a lender looks at you when determining creditworthiness.  A credit score is a just a way to measure the likelihood that you will pay back a debt.  Lenders also consider debt to income ratio.  Before filing bankruptcy your debt to income ratio was probably terrible.  You had a job, hopefully, but you owed a lot of debt.  After receiving a bankruptcy discharge, you still hopefully have a job, but now you have wiped out the majority of your debt.  If you were a lender trying to determine who to loan money to, would you give the loan to the guy with a lot of debt or would you loan the money to the person with no debt but a bankruptcy on their credit report.  Logic would say the latter person would be in a better position to pay back the loan.

For more information about how bankruptcy affects your credit score contact a north Texas bankruptcy lawyer.