Bankruptcy Affects Your Credit Score

February 23, 2012 by  Filed under: Bankruptcy 

Bankruptcy can be an ugly word for anyone who has ever watched Wheel of Fortune. You land on the black “BANKRUPTCY” spot and lose all your money. How awful for that person who was hoping to win a few thousand dollars just for spinning a wheel and picking letters! The difference between that person and someone who actually has to file for bankruptcy is that the contestant on Wheel of Fortune has a chance to earn more money throughout the show. The person filing for bankruptcy is at their wit’s end and has decided to make a life-changing decision to start over – literally.

To understand how bankruptcy can affect your credit score, you must first understand bankruptcy itself. There are two types of bankruptcy: liquidation and reorganization. Liquidation is just like it sounds. The bankruptcy trustee will liquidate some of your property in order to help pay back some of your outstanding debt. With reorganization, you are able to keep your property, but must agree to pay timely monthly payments over the course of a set amount of years in order to pay back some or all of your debt, depending on how much there is. Of course, since bankruptcy is a huge deal, there are several rules and regulations in place for each type, and you must abide by them if you want to get through this process.

Something you must keep in mind is that bankruptcy does not work with all debt types. There are several that are not covered under bankrupt law, such as child support and the majority of tax debts. Be aware of your rights.

Now that you understand how bankruptcy works, you can learn about how it will affect your FICO score. The first thing that probably comes to mind is that your score will end up in the toilet, but this is not necessarily true. People who are in danger of going bankrupt are less likely to have a high credit score in the first place, so there really is not much to lose when you do go bankrupt. When you are in danger of going bankrupt, you likely already have a history of late or missed credit card payments and other issues that affect your credit score negatively. In fact, sometimes the only way for that number to go is up because it was already so low in the first place. This is slightly good news hot on the heels of bad news.

Once you declare bankruptcy, your credit report is essentially carte blanche, basically starting over, which may give your credit score a very slight boost. All your delinquencies from the past are wiped clean, which gives you a good solid ground to start building from once again. The best part is that bankruptcy can help your credit score significantly in the long run because you will be compared with other bankruptcy filers, not with people who have never had a credit problem in their life. As long as you keep up the good work, your score will soar. Read more about bankruptcy and credit scores.

MaryLou Walston
Credit score
Bankruptcy and credit scores

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