Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
Bankruptcy is GOOD for your credit score!
“Wait a second!” you say, “bankruptcy ruins your credit for 10 years. Everyone knows that!” False.
People come to me with preconceived ideas about bankruptcy. Some even show up and proclaim, “I’m not here to discuss bankruptcy.”
If you ask 10 people at Publix…
I’ll bet anyone $100 that if you ask 10 people you meet at Publix (that’s a grocery store chain here in the Southeast for those of you not living in this area), all 10 would say that bankruptcy hurts your credit. And all 10 would be wrong.
In fairness, the question assumes one key fact: That the hypothetical person we’re talking about NEEDS to file bankruptcy. If, on the other hand, our hypothetical person has no need to file because she doesn’t have much debt and is current on her obligations, then of course filing would hurt her credit. But she would never file anyway!
Why does filing help my credit score?
Every month you fail to make timely payments on your mortgage, car loan, credit cards, and other obligations, it’s reported on your credit. Instead of “as agreed,” the obligation will report 30 days late, 60 days late, 90 days late, charged off, and so on. Bad, bad, bad. You look like a bankruptcy waiting to happen!
Once you get your discharge, all that negative reporting stops. It goes from bad, bad, bad, to nothing–at least for a while. If you then get a car loan or a secured credit card with a small limit, your credit report will show good, good, good.
Think of it like grades in school
If you can’t pay your debts, you’re getting Fs. F, F, F, F, F. You get the picture. Not a good grade–and not a good credit score! Once you get your discharge and the Fs stop coming, your average moves up. Then you start paying on time with new debt, and you have A, A, A, A. It’s just basic math.
What can I expect one year after bankruptcy?
Each case is unique, but when I ask clients, I hear that they have credit scores of 650 or higher only ONE year after bankruptcy. Is the bankruptcy on their credit? Sure, and so are all the defaults (the F, F, F, F), but the score is rising. Keep in mind that you only need a 640 (at most) credit score for an FHA mortgage loan.
Obviously, not everyone needs to file bankruptcy, and a good attorney will give you all your options. But if you do, you need to know the truth: bankruptcy is GOOD for your credit score!
