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How Bankruptcy Affects Credit Score

How-Bankruptcy-Affects-Credit-Score

Bankruptcy is a legal proceeding where debtors have the opportunity to reorganize or eradicate their debt. Filing for bankruptcy can be a very financially rewarding situation for those overwhelmed with debt. A bankruptcy lawyer should be consulted as filing for bankruptcy is not an easy decision.

While the main purpose of bankruptcy can help to ease your debt burdens, it provides the added benefit of typically boosting credit score. Although the bankruptcy could appear on the credit report for up to 10 years, it does not have the detrimental effect some people might think it does. 

Obtaining credit after a bankruptcy case is typically very easy.  Credit cards, which are important for emergencies, typically can be obtained right after discharge (albeit with low limits in the range of $250 -$500).  Your credit will usually improve if you follow some simple steps to boosting it after bankruptcy. 

How long is bankruptcy listed on your credit report?

How long a bankruptcy is listed depends on which chapter you file. Chapter 7 and 11 bankruptcies will appear on your report for up to 10 years after filing. In Chapter 13 cases, it remains on the credit report for up to 7 years 

What’s a FICO Credit score, and how it affects you

FICO Score is a three-digit score calculated with the information found on your credit report. It allows lenders to assess how likely you are to repay the loan. As a result, the score impacts how much you can borrow, how long you have to pay back, and its cost.

Your FICO credit score is also the most significant indicator of whether you receive credit, how much, and the interest rate. The higher the score, the lower the interest rate. A bankruptcy filing will typically cause your score to increase. Reasons for this are because creditors must remove all negative information from your credit score when you file bankruptcy.  This causes your debt to income ratio to increase, and stops negative marks from decreasing your score.

Recovering your credit

Your credit isn’t ruined after you file for bankruptcy.  In fact, almost all of my clients experience the opposite effect.   As long as you maintain a good payment record for current creditors, only taking out the credit lines that you can afford and paying back the loan as negotiated, you should see your credit score grow.

 

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