This is a common concern for many people who are considering a bankruptcy filing – especially because by the time they are considering bankruptcy, their credit is likely damaged already due to unpaid bills, collection agencies reporting to the credit bureaus, high income-to-debt ratios, lawsuits and other financial issues. If your credit is already bad, will filing for bankruptcy make it worse?
A bankruptcy filing, just like a foreclosure and lawsuit judgment, does go on your credit report, and will be there for 10 years although the more time passes the less relevance, and thus negative effect, it has. An initial drop in credit rating will most likely occur when the case is filed, however our experience after representing thousands of clients tells us that filing for bankruptcy can actually lead to a better credit rating. Yes, you read that correctly – filing for bankruptcy really can IMPROVE your credit rating!
How is that possible? Sounds too good to be true? It’s really not, and here’s why: one of the major factors on your credit score is your debt-to-income ratio. Your score is negatively impacted when the facts reveal that you have more debt than your income can sustain. Banks don’t want to lend out to anyone who they suspect cannot pay them back due to their high debt level. Once your bankruptcy is complete and your debts are discharged, your debt-to-income ratio will likely be significantly better than it was previously, which can have a positive impact on your credit rating. This is why just about every single person we know who files bankruptcy gets solicitations in the mail from car dealerships. They know there are filers out there that can get approved for an auto loan because they filed. These same individuals would very likely not have qualified had they not file for bankruptcy. Essentially, lenders believe these people now have a better chance of repaying their car loan.
Therefore it is not unusual for people who file for bankruptcy to get secured or unsecured credit cards as quickly as a few months after filing for bankruptcy, and many people are able to finance a new car even before their discharge!
Since bankruptcy wipes out much of your old debt, you will likely find yourself in a better position on the other side not only when it comes to paying your current bills, but getting new credit will often be easier than it was prior to the bankruptcy filing and the interest rates offered will increasing go down so long as you are paying your bills going forward.
Bankruptcy may be a last resort for some, but if your income is just not sufficient to meet your essential living expenses as well as your debts, it can be a solution that helps you get on a path to better credit and better financial health. So will filing for bankruptcy affect your credit? Yes – but not necessarily in a negative way!
While an initial drop may be seen, it will likely bounce back quicker and allow you to manage your finances going forward without feeling out-of-control. Don’t let worries about your credit rating stop you from pursuing all of your options – the financial impacts of filing for bankruptcy are likely to your benefit, even when it comes to your credit score.