Bankruptcy laws were put in place to provide people with relief from creditors by offering a fresh start. This fresh although comes with a hit to your credit, it will give you an opportunity to help your credit in the short and long term.
How Bankruptcy Affects Credit Scores
When you file for bankruptcy, your FICO score, which is a rating system that predicts how likely you are to pay your debts as agreed upon, can impact your score almost right away.
For most people, bankruptcy means that your FICO score will drop, at least temporarily. If you have good credit you will most likely take a big hit. But if you have a low credit score, bankruptcy won't hurt your FICO score that badly. It could potentially make it easier for you to improve your FICO score post-bankruptcy.
How Bankruptcy Can Help
When people find themselves in a position where they must file bankruptcy, then your FICO score is not nearly as important for the vital reasons for having to file bankruptcy. In most cases people find that bankruptcy may actually help your credit.
SHORT-TERM POSITIVE EFFECTS
Getting rid of "delinquent" account reports.
If your credit report contained late payments and high credit balances, this is where a bankruptcy discharge can serve the greatest good. A bankruptcy will essentially wipe those debts clean. This is because debts that are discharged in bankruptcy must no longer be reported as "delinquent.' Instead, they will typically be reported as discharged or included in your bankruptcy. In some instances, this could even boost an already low credit score.
Improving your debt-to-credit ratio.
Bankruptcy may help improve your debt-to-credit ratio. This ratio is a comparison of your outstanding debt to your available credit balance. It can account for roughly 30% of your FICO score. The lower your debt compared to your available credit, the higher your potential FICO score. If you have credit accounts with high credit limits, they are normally closed or frozen when you file bankruptcy. However, if you reaffirm debts with low balances and good credit limits, or obtain new credit accounts after your discharge, this can potentially boost your FICO score. That is because you have little to no outstanding debt compared to available credit limits, which results in a favorable debt-to-credit ratio.
LONG-TERM POSITIVE EFFECTS
By wiping your debt history clean, bankruptcy gives you the opportunity to start over. You have a another chance to get your finances right. If you budget properly and are disciplined with your money, you can lay the foundation for building good credit history. By not being burdened with the outstanding debt that you discharged in the bankruptcy, you should have more disposable income to make credit payments on time. If you establish a good track record of paying your new, post-bankruptcy debts, you can increase your credit score over time. This can happen as early as six months to a year after bankruptcy.
Bankruptcy can appear to be a process that is stressful. But here at Atlantis Law we make sure that all of our clients understand the process in a way where it is not complicated with jargon people can't relate to. We also help you from beginning to end with our exclusive credit rebuilding program to help you get back on track financially.
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