Bankruptcy

I am often asked by my clients, “What will bankruptcy do to my credit score?“. This is an important question and the answer will vary based on your credit score at the time of the bankruptcy filing. For most people, bankruptcy will actually RAISE your credit score. This may seem shocking and counterintuitive to some – but, look at it this way: Credit is all about debt- to- income ratios. If you have high income and very low debt you are very credit worthy. Now let’s use the reverse scenario: If you have lower income and higher debt, you are less credit worthy. In other words, the higher your debt- to- income ratio; the less credit worthy you will be and, thus, have a lower credit score

There are other factors other than just your debt- to- income ratio that will influence your credit score; factors such as 30, 60, 90, & 120 day late payments on secured and non-secured debts; prior foreclosures; prior repossessions; defaults on credit card debt; length of credit history ( how long you’ve been using credit ); completed credit transactions ( i.e., purchase and payoff of an automobile or other secured debts ); and many other factors that are part of the long algorithm that composes your credit score.

But, the most important single factor is your debt to income ratio; how much money you (& your spouse) make vis-à-vis your current debt load.

For most people that I see, they have good income, but are saddled with debt; backwards on their home mortgages; $20,000 to $50,000 in credit card debt & backwards on one or two cars.

Now to the Point! When you file for bankruptcy, your income (whether high or low) remains the same; but all of your debt goes away. You may choose to keep some debt (i.e. your home loan or a car loan), but all of your unsecured debt (i.e. credit card debt, judgments, repossessions, wage garnishments, personal loans, payday loans, bounced checks, over-drafted accounts, and, in some cases, Federal and State income taxes).

Thus, when you file for bankruptcy, ALL OF YOUR DEBT goes away (except in student loans, spousal and child support, and some income taxes) & your income has not been lowered but remains the same. Again, in this scenario, your debt to income ratio is completely realigned & your credit score goes up.

For most people, by the time they come to me, they have had some 30, 60, and 90 day lates on a mortgage, car loan or credit card, and maybe a car repossession or legal judgment.

Thus, by the time they come to me their credit score has already taken a “hit” & has nowhere to go but up. In other words, for most, their credit score has been lowered by a hundred or more points by the time they come to see me. In most cases, the bankruptcy lasts about 90 days from start to finish. Within a year after the discharge (the end of the bankruptcy) their credit score has risen more than 100 points, and, for most, within two years, their credit score is back within that “A” paper rate – the rate that would get you that 5% car or home loan.

Thus, FOR MOST PEOPLE, as long as they don’t get lates on their credit report after the filing of the bankruptcy for the debt that they keep, their credit score, in 2 years after the bankruptcy filing, will be much higher than when they first came to see me.

Therefore, to answer the question: “What will bankruptcy do to my credit score?’, the answer is, “For 90% of the people who file bankruptcy, their credit score ACTUALLY goes up after the filing of a bankruptcy”.

-Roman