In Part One and Two of our series on credit and bankruptcy we have discussed how to improve your credit score as well as the impact of missed payments on your credit score. If you are feeling financially overwhelmed and considering bankruptcy, the question of what happens to your credit in the event you file bankruptcy is a common one.
To be very clear, filing for bankruptcy will definitely affect your credit score. But how filing bankruptcy affects your credit score really depends on the state of your credit score prior to filing. You may be surprised to find out that bankruptcy will not, in some cases, cause as big a hit in your credit score as you assume.
Let me explain: if your credit score is very poor due to delinquent accounts, maxed out credit cards, charged off accounts or collection accounts, filing for bankruptcy protection won’t affect your score that negatively (granted, your score is most likely already low). The reason for this is that once your debt is discharged, your creditors must update your credit report to reflect the account as being “discharged in bankruptcy” and must change the balance owing to “$0”, and all ongoing derogatory reporting must permanently cease. Granted, you aren't likely to see a big jump but if you've just been scraping by, your score isn't likely to fall much further.
On the other hand, if you have remained current on all your payments and your credit score is immaculate, your credit score will take a hit after filing chapter 7 bankruptcy. However, many clients find that discharging the debt they may otherwise never be able to pay off is worth the temporary hit to their FICO score.
Ultimately, if you are considering bankruptcy, how it may affect your credit score is important information to understand, but then again, your credit score alone shouldn't affect whether or not you decide to file bankruptcy.
That said- if your debt payments are crushing you, bankruptcy can give you a much-needed fresh start. While filing for bankruptcy protection will affect your credit score, it may not be as negative as you may think. And with credit repair strategies, you may be giving yourself a much-needed boost to long-term financial freedom down the road.
We will discuss repairing your credit after bankruptcy in Part Four (coming soon) of our series on credit and bankruptcy.
If you want more information on filing bankruptcy, visit http://www.KDBLawFirm.net/.
Be safe and be well! ~KirkBerkhimer, Norfolk Bankruptcy Attorney
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