One of the main reasons many struggling borrowers put off or discount the idea of bankruptcy is that it will damage their credit score. And while this is certainly true on some level, the damage may not be as bad as you think it will be. Why? Here are five of the most important reasons bankruptcy is unlikely to ruin your credit score.
1. Your Score May Already Be Bad
Unfortunately, by the time most people need to file for bankruptcy, their credit score has already taken a lot of hits. You may have many late and missed payments, defaults, garnishments, and repossessions already on your report. So, while bankruptcy will add a black mark to your credit score, that one hit will probably cause less damage than all the other black marks that will happen if you continue to struggle.
2. Chapter 7 Bankruptcy Is A One-Time Hit
Chapter 7 bankruptcy involves adding up your available assets and determining what can be used to pay creditors. Then, the remaining debt is discharged at once. The entire process can take as little as a few months. However, you will have to take the hit on your credit in order to begin to rebuild almost immediately. Compare that with a DIY approach that could mean several more missed or late payments for years on end.
3. Bankruptcy Notations Don't Define Scores
Your credit history will be notated to include references of any discharged debts, but that won't be the only factor on your credit report. You can counter the effects of this addendum and related discharges by immediately taking positive steps, like paying reaffirmed loans on time and taking out new, limited sources of credit to start over and create a fresh history.
4. Bankruptcy Changes Existing Accounts
An innocuous-sounding change on your credit report can make a lot of difference after bankruptcy. This change happens when an account that was marked as 'late' or 'in collections' is now marked as 'included in bankruptcy'. All those late and missed accounts no longer clog up your history. This single change starts the credit recovery process.
5. Your Debt-to-Income Ratio Improves
One less-understood credit rating factor is how much debt you carry in relation to your income. If you're loaded with debt and have high minimum payments, that ratio is going to be high. This makes lenders less likely to want to extend more credit. But when some or all of that debt is discharged through any chapter of bankruptcy, your ratio will gradually improve. You become a better candidate for new loans.
Where to Learn More
Want to know more about why the injury to credit scores after bankruptcy might not be as bad as you think? Start by meeting with an experienced bankruptcy attorney in your state. They will help you evaluate the likely effects based on your individual history and the type of bankruptcy that's right for you. Call today to make an appointment.