How Will Bankruptcy Affect My Credit Score?

This question comes up frequently in client interviews. Many people are convinced that a bankruptcy filing will ruin their credit and they’ll never be able to buy a car or house. In most cases, that’s simply not true.

– Don’t confuse a credit score with a “life score.” A credit score is simply a tool banks use to decide whether or not to extend credit to you and to determine what interest rate to charge you. A 760 credit score doesn’t make you a better person than someone with a 500 credit score. If you really believe a high credit score is valuable, take it to the grocery store and see how much you can buy with it.

– If you are behind on credit card payments or have had judgments entered against you, your credit score is already pretty shot. It will likely improve after filing bankruptcy, because your debt to income ratio will be significantly better.

– If you have a high credit score, it may be artificially high. Someone with $50,000 in credit card debt who makes the minimum payments each month on time may have a great credit score because of those timely payments. But if that same person is devoting nearly all of his disposable income to those payments, he’ll be denied a car loan or home loan because his income can’t support the additional payments. If it can’t get you a great rate on a loan, what good is that high credit score?

– A bankruptcy filing will show up on your credit report for approximately 10 years. That doesn’t mean your credit score will remain low the entire time. Your financial life after the bankruptcy will also appear, showing your record of payments post-bankruptcy. As a rough guideline, your credit score will return to its pre-bankruptcy level in about 4 years.

– You *will* get credit again after filing bankruptcy. In general, you’ll receive credit card applications within 6 months of getting your discharge. It’s fine to accept those offers as long as you pay your balance off in full and on time each month. You should qualify for a car loan in about 18 months, and a home loan in 5-6 years. The farther you get from the bankruptcy, the better your chances of getting credit extended to you and of getting a better interest rate. You may be able to shorten those times by having a cosigner or agreeing to a higher interest rate.

If you’re deep in debt, facing foreclosure, having your wages garnisheed, and fighting off the repo man, your credit score should be the least of your worries. Usually, it’s best to file the bankruptcy, get a fresh start, and begin rebuilding your credit. Talk to a bankruptcy attorney for advice tailored to your specific situation.

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