There are a lot of horror stories online about how filing bankruptcy will ruin your credit rating forever. If you look closely at these web sites, and do the research to find out who actually owns the web site, you will probably find out that it is owned by a credit card company, mortgage lender, or an association representing creditors. In my experience, the truth is that filing bankruptcy is the first step towards improving your credit score.
Credit reports are basically a description of a person’s financial history. They list payment history for specific accounts, the balance owed, the credit limit, when the account was opened, and a vast amount of other financial information. If you are considering filing bankruptcy your credit score is probably low and your report full of negative notations. If you are in this situation your credit report is already in bad shape. After filing bankruptcy, the credit report goes through some changes. Credit card accounts are closed and the status is changed to discharged, meaning the debtor isn’t liable for the debt any longer. This is important because one the most damaging factors on a credit report is the amount owed to creditors as a percentage of credit limits. The higher the balance owed as a percentage of the credit limit, the more detrimental the impact to the credit score. After filing bankruptcy the debtor’s balance to limit ratio is improved because the debt is discharged. As a result, the debtor’s credit score improves.
Bankruptcy also helps debtors improve their ability to make payments on time. Once the bankruptcy is filed, all those accounts that were not being paid timely before filing are discharged, and the ones that survive the bankruptcy, specifically secured creditors with collateral they intend to keep after bankruptcy, are more likely to get paid on time. This change in the ability to make payments on time each month allows you to establish a positive payment history which is reflected on your credit report.
Let me be clear about one thing; improving a credit rating is not something that happens immediately. After filing bankruptcy there is a decrease in credit score. However, within a year if you make payments on time, maintain steady employment, and don’t incur additional debt, your credit rating should improve, and the road to good credit is usually much shorter for those people that file bankruptcy and get a fresh start than it is for people that struggle for years with debts they cannot repay.