Does Filing Bankruptcy Decrease Your Credit Score?
One of the biggest impediments or hurdles for people considering bankruptcy is the perception that it will have a negative impact on their credit. Will they be extended future credit?½..be able to purchase a house?½.a car? Yes, yes & yes! It surprises most people to learn that filing bankruptcy will actually have a positive effect on your credit. Why? Here are the reasons (& credit score projections to back it up!). For a free and immediate consultation with a licensed debt resolution attorney, call us today at 866-261-8282 or schedule an appointment on-line. We are here to answer your questions and evaluate your circumstances to determine the best course of action for long term financial success.
Bankruptcy Reduces Risk for New Creditors
Your credit score aids potential new lenders in determining how much risk they will take-on by extending you new credit. A creditor's main concern: will they get paid on-time and in-full? When creditors see aged debt or collections, it signals unresolved debt that could interfere with their ability to get paid. Even if you have the income to warrant the additional credit, nothing derails a budget more than an unexpected garnishment where suddenly you are missing 25% of your pay check or your bank account is emptied out to satisfy an old debt. This will most likely compromise your ability to pay other current debts and important bills. By seeking debt resolution through Chapter 7 or Chapter 13 bankruptcy, new creditors have the assurance that old debt has been dealt with and will not interfere with your ability to pay new credit sources in the future. In both cases, you receive a legal discharge from certain debts which means an official end to the debt obligation and reduced risk to future creditors.
- Chapter 7 bankruptcybrings immediate debt relief by eliminating all general unsecured debts, such as:
- Credit cards;
- Medical bills;
- Personal loans, etc.
- Chapter 13is a comprehensive debt consolidation program with court oversight to bring legal debt resolution for issues such as:
- Home foreclosure;
- Vehicle repossession;
- Collections or garnishments and;
- Reduction or elimination of unsecured debt.
Bankruptcy Reduces and Removes Debt to Improve Your Debt-to-Income Ratio
Simply put, bankruptcy is a legal means of resolving debt. One important component of your credit score is your debt load or debt-to-income ratio (influencing 30% of your score according to FICO). This is the proportion of how much debt you are carrying versus the available income to pay it. To calculate your debt-to-income ratio, use our free budgeting toolto determine your score. Bankruptcy brings immediate relief to your debt load by eliminating debt through Chapter 7 or reducing and consolidating debt through a Chapter 13 bankruptcy. Reducing your debt-to-income ratio will have an immediate positive effect on your credit.
Bankruptcy Stops Late Reporting to Credit Bureau
The factor that most influences your credit score is payment history. This aspect alone accounts for 35% of your credit score. Have you been paying your bills on time and as required? Old debt and collections, even charged-off debt, can keep your score depressed by showing a delinquent item on your credit report. Bankruptcy stops late reporting to the credit agencies. The debt is either legally eliminated in a Chapter 7 or rolled into a consolidation program with Chapter 13. In either case, your credit does not reflect late payments or delinquent payments. Removing late payments will have a positive impact on your credit.
Bankruptcy Provides Lasting Legal Debt Resolution
While many companies claim to be able to fix your credit or claim to be a better alternative to filing bankruptcy, no other program can offer the same broad legal protection or creditor cooperation and debt relief as bankruptcy. A court discharge after bankruptcy means you:
- Are free from all unsecured debt obligations;
- Your credit reports has been cleared of delinquent accounts;
- You are up-to-date on secured debt obligations such as a home or vehicle payment;
- Your creditors cannot call you, harass you or try to collect on debts while you are under bankruptcy protection.
The Proof is In the Numbers!
Recently, our credit reporting service (CIN Legal Data Services) started providing projections on how our clients' credit scores would change after 12 months of completing their bankruptcy case. For more information on this, please visit our latest webpage on "What is the Fastest Way to Improve Your Credit Score". In a sample of ALL actual filed cases we filed since this information became available, here is the output we calculated:
- Over 82% of the clients saw a positive climb in their credit score;
- The average score increase was 10% (lowest drop was 5% and highest increase was 22%);
- The average score increased by 71 points;
- Over 82% of the client projected a score was in the 600's;
- The median post-bankruptcy credit score was 639;
- The average score prior to filing was 557 and the average post-filing was 628.
We are here to help! Call us today at 866-261-8282 for a free consultation on with a licensed Michigan attorney to discuss your options for debt resolution and credit repair. For over a decade, we have helped Michigan families find last debt relief and financial peace of mind. We offer phone appointments or in-office consultation at any of our seven convenient locations in: Detroit, Ann Arbor, Dearborn, Flint, Southfield, Lansing or Warren.