Bankruptcy and Your Credit Score

Filing for bankruptcy can provide you with debt relief and help you start afresh financially. However, there are many people who don’t have any idea about how to file bankruptcy at all. Some believe misconceptions or have heard horror stories about bankruptcy. There are some, still, who believe that declaring bankruptcy will hurt their credit score forever. These are just a few of the many reasons why there are those who might not be too keen on filing for bankruptcy.

According to Bankruptcy Canada, with the help of licensed insolvency trustees and debt relief attorneys, you can file for bankruptcy and protect your credit score in the long run. Here’s the how and why of it.

The Relationship of Bankruptcy and Your Credit Score


Before you can appreciate how filing for bankruptcy can do your credit score some good, you should first understand the relationship between the two. The main thing you have to remember is that bankruptcy WILL cause your credit score to decline. You will suffer the most “damage” if you have a good credit score and then file for bankruptcy. This is simply the law of proportion at work — the higher your pre-bankruptcy score, the bigger the drop will be. Taking this into consideration, if you already have a low credit score due to your debts, then filing for bankruptcy will not affect your score too much.

You should also remember that there is no way to know how many points you will lose when you file for bankruptcy. This is because credit scoring systems change and credit scoring agencies usually keep their formulas private. Different creditors also use different criteria, so the best you can really do is estimate the impact of bankruptcy to your credit score. Consult with professionals to know how much of an effect bankruptcy can have on your credit score based on the current state of your finances.

How Can Bankruptcy Help Improve Your Credit Score

One of the most immediate positive effects of bankruptcy is that it can help you get rid of late payments and other “delinquent” account notes on your credit report. When your debts are discharged in bankruptcy, they should no longer be recorded as delinquent. Essentially, this gives you a clean slate. What’s more, if you already have a low credit score prior to filing, bankruptcy may actually help give your score a little boost.

Bankruptcy can also help improve your debt-to-credit ratio. Simply put, this is the ratio between your outstanding debts to the percentage of all your available credit. The lower the amount of your outstanding debts compared to your credit balance, the higher your score will be. Filing for bankruptcy closes or freezes accounts that have high credit limits; at the same time, you can reaffirm debts that have lower balances. This results in a considerably smaller amount of debt to settle versus your available credit, resulting in a better score. Another thing: if you are a bankrupt consumer but have a good record of paying on time, you will most likely have a better credit score than someone who hasn’t filed for bankruptcy yet have tons of liabilities.

Myths About How Bankruptcy Affects Your Credit

Misconceptions abound when it comes to how bankruptcy affects someone’s credit. The most persistent one, it seems, is that your bankruptcy information will be reflected on your credit report for 10 years. However, this time frame only applies to the public records of a Chapter 7 bankruptcy. All the rest remain only for 7 years. When these details disappear from your credit report, you should see a bigger boost on your score.

It’s also a common belief that as long as your bankruptcy information is in your credit report, you will also have poor credit. But with careful and smart credit management, you may be able to improve your score in as early as four years. Some ways to achieve this is to consistently make on-time payments for all your debts, and use no more than 30 percent of your credit card balances.

Finally, you should remember that your credit score post-bankruptcy is not affected by your score pre-bankruptcy. Raising your credit score to a good number (700 or above, in a range of 300 to 850) depends on what you do and how well you manage your finances right after your file bankruptcy and the years following it.

Dealing with debt can be overwhelming and even downright terrifying at times. There are also many things that your may not be able to understand, especially if it’s the first time that you’re facing them. This is why you need to stick to the facts — consult with bankruptcy and debt attorneys and do your research. Knowing the right information is half the battle.

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