Tuesday, January 24, 2012

How Can I Repair My Credit Score After Bankruptcy?


Your credit score is an important number that determines your rate of interest on loans and credit cards. The question of what happens to your credit score in the event you file bankruptcy a common one in my Kansas City bankruptcy consultations. Filing for bankruptcy will affect your credit score, but just how it affects your score depends on a number of factors.
An important thing is to first understand is how your credit score is calculated. The most common score used is the FICO score. The score, the 3-digit number, is calculated using several different inputs. The largest portion of the score is based on your payment history (35%); followed by your overall debt level, or amount you owe (30%); the actual length of your credit history (15%); the number of inquiries, also known as new credit, (10%); and closed out by your mix of credit (10%). A detailed explanation of a FICO score breakdown can be found here:
If your credit score is already poor due to delinquent accounts, filing for bankruptcy won’t be a huge hit to your score. The reason for this is because once your debt is discharged, your creditors must update your credit report to reflect the account as being “discharged in bankruptcy” and must change the balance owing to “$0”, and all ongoing derogatory reporting must permanently cease. So the 30% portion of your FICO score which is "what you owe" will actually improve.
On the other hand, if you have remained current on all your payments and your credit score is immaculate, your credit score will take more of a hit after filing bankruptcy. However, many clients find that discharging the debt they may otherwise never be able to pay off is worth it. In the big picture, there are things you can do to improve your score after filing bankruptcy, and if you are facing debt that has become unmanageable, a temporary hit to your FICO score may be a worthy tradeoff for a more manageable financial future.
While filing for bankruptcy protection will affect your credit score, it may not be as negative as you assume. In the long term, bankruptcy can be the best path to a solid financial future. A good option is to consult with a lawyer who can look at your financial situation and give you options to consider, one of which may be bankruptcy.
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