How Bankruptcy Can Help Your Credit

How Bankruptcy Can Help Your Credit
Declaring bankruptcy can be devastating to your reputation and self-confidence, but you may be surprised to learn that bankruptcy can actually help your credit. If you had a good credit score before filing for bankruptcy, you can expect your score to take a large dip after filing.

According to FICO scores, which are used by most lenders, you fall into the category of having good credit if your scores are in the mid 700s or above. If you started with a low score you won’t experience a drastic dip in your score. In fact, filing for bankruptcy will be one of the few, if not only times that having bad credit will work in your favor.

Unlike other forms of debt management, filing for bankruptcy is one of the fastest ways to reduce debt and regain control of your finances. Bankruptcy can alleviate most of your financial obligations, but there are a few exceptions. The court draws the line when it comes to child support, alimony and student debts, you will NOT be exempt from these payments.

Your credit score will be affected the same, regardless of whether you’ve filed for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is generally filed by individuals with an inconsistent or low income, and minimal or no assets. Chapter 7 completely eliminates unsecured debts, like credit card charges, allowing you to start with a clean slate.

On the other hand, Chapter 13 works by reorganizing your debts. If you have a consistent income, you’re required to file for Chapter 13 instead of Chapter 7 bankruptcy. With Chapter 13, you’ll repay a percentage or all of your debts over a period of time. The amount repaid is determined after seeing how much of your income is left after paying your monthly expenses.

Since you’ll be repaying your debts, you won’t lose any of your property or nonexempt assets. Although your credit score won’t be affected any differently, some lenders may be more biased towards an individual that chooses to repay their debts.

Filing for bankruptcy is like hitting the reset button on your finances. Once you take the right steps, you’ll start to see a rise in your credit score. One of the first practices you must adopt is paying your bills on time. 35% of your credit score is made up by your payment history.

The next step may seem counterintuitive, but it’s also best to avoid closing your credit accounts. Keeping credit lines open, like credit card accounts, will help prove to potential creditors that you’re capable of utilizing their services without becoming a credit risk. If you’re uncomfortable with this idea, you can always cut up your cards to reduce the temptation to spend. If you possess a bit more self-control, you can make small charges to the card then pay the total balance when the bill is due.

Improving your credit score after bankruptcy won’t happen overnight. However, with patience, self-control and determination, you can prove to creditors that you’ve learned from previous financial struggles.

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