August 9, 2016

Bankruptcy is rarely a positive credit event.  However, it is important to understand that in certain circumstances, filing for bankruptcy can actually help to improve an already damaged credit score within a relatively short amount of time.  In some cases, it is much easier to improve your credit score after filing a bankruptcy than it would be to try to improve the score without the bankruptcy.  In order to understand the relationship between your credit score and the effect of bankruptcy, it is important to understand some of the basic aspects of how your credit score is determined.


Multiple factors go into calculating a credit score.  These factors include payment history, debt to income ratio, amount of credit used, and the type of debt incurred. The following is a brief description of these categories in order to help explain why they are important when establishing your score.

Payment history is one of the most important factors in determining a credit score. Creditors can record a negative mark on an account status when you miss or make late payments, or can note that the account is delinquent or in default. Accounts with negative marks bring down a credit score more than any other factor. Debtors who have open accounts in default, or accounts marked delinquent are generally perceived as lacking the ability to pay back current debts.

Other key aspects of your credit score are your debt to income ratio, and whether you have maxed out your available credit lines.  Both of these can negatively affect your score and can lead lenders to determine that an individual is already pushed to the limit of their ability to repay debts due to their existing financial constraints.

Keep in mind not all debt is looked upon negatively. Certain debts can sometimes be seen as “good” debt for credit purposes. Good debt is typically anything that can lead to improved financial stability (a first home mortgage or student loans), that show current payments have been maintained. Bad debts are often transactional consumer type debts that tend not to indicate improvement to financial stability (credit card debt, personal loans, etc). However, an important key to understand is that all debt is potentially damaging to your credit score if it is not paid in a prompt manner.

Filing for bankruptcy can often provide a solution to issues that may be negatively affecting your credit score. After filing bankruptcy, the Automatic Stay goes into effect and stops all creditors’ debt collection actions.More importantly from a credit perspective, within a few months of filing bankruptcy, the negative credit report marks recorded by creditors will no longer have the effect of bringing down a credit score and the credit report will indicate a zero balance owed.  Sometimes this in and of itself will help to start turn around your credit score, or at least provide a basis from which you can begin to rebuild without the weight of old debt anchoring your score down month after month.

Bankruptcy discharges the majority of debts, including credit card, medical debt, utility debt, service debt, and personal loans. It can also stop garnishments and lawsuits.  Once the debt is cleared, your debt to income ratio will be notably improved, as well as your bad debt ratio, all of which can help improve your credit score.

While bankruptcy may help provide you with a path to improve your credit score, there are many factors to review when considering bankruptcy. To put your mind at ease, or simply to gain a better understanding of the process, please contact one of the board certified bankruptcy attorneys at Keller and Almassian, PLC.



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