Did you know that filing for bankruptcy can hurt your credit? That's right! Your credit report may take a hit after filing for bankruptcy protection. Did you also know that bankruptcy can also be the fastest way to improve your credit score? The fear of the credit report taking a hit discourages many people from considering bankruptcy in the first place. Although bankruptcy can stay on your credit report for up to 10 years, not filing for bankruptcy and allowing your debts to go to collections and judgments can also negatively impact your credit for many years.
Credit has become such an important part of our lives that living without good credit can be a huge inconvenience. Many people are afraid of losing good, or even mediocre, credit, and therefore, they struggle with debt for months or even years before they ever consider filing for bankruptcy.
Bankruptcy's Impact on Your Credit Score
If you carry debt, as most people do, you will have a FICO score, which is a rating system that predicts how likely you are to pay your debts as agreed upon. Lenders use your FICO score to predict whether you'll be a reliable borrower who will make monthly payments on time.
It's difficult to predict how much your credit score will be affected after you file for bankruptcy. The impact on your credit score is based largely on where your credit is before you file for bankruptcy. That's right, in many cases, it is not the bankruptcy that kills a credit report, it is the individual's circumstances before filing for bankruptcy. Most people who file for bankruptcy will see a slight drop in their FICO score. People who start out with a good credit score usually suffer a dip in their score. On the other hand, if you already have a low credit score, bankruptcy won't hurt your FICO score as much.
How Bankruptcy Can Help Your Financial Future
Again, many people avoid filing for bankruptcy because they don't want their credit score to take a hit. If you find yourself in a situation where bankruptcy is the best possible option, your FICO score won't be as important as the reasons you're filing for bankruptcy in the first place. After you've filed for bankruptcy, you'll likely see the opportunity as a fresh financial start, and you may find that bankruptcy actually helped your credit.
If your credit report contained documentation of late payments and high credit balances, a bankruptcy discharge will be beneficial in that it provides a fresh start. This is because the debts that are discharged are no longer reported as "delinquent." Instead, they'll be reported as discharged or included in your bankruptcy.
Overall, the biggest benefit of filing for bankruptcy is that it gives you the opportunity to start over by wiping your debt history clean. This gives you a chance to take control of your finances and properly manage your money. If you budget your money after bankruptcy and are disciplined in your spending, you can lay the foundation for building a good credit history.