Bankruptcy can be a difficult decision to make, but it may also be the best option for your financial situation. After you file for bankruptcy, you might be wondering what will happen to your credit score.
Although bankruptcy will stay on your credit report for seven to ten years, it is not necessarily a death sentence for your credit score. Most people know that bankruptcy can help improve their credit score in the long run. What many don’t know is that filing bankruptcy can sometimes result in an improved credit score fairly quickly in many cases.
When you file for bankruptcy, all of your debts will be discharged. This means that you will no longer be responsible for making payments on those debts. As a result, your debt-to-income ratio will improve, which is one of the key factors that lenders look at when considering a loan.
Your credit score will also improve because you will no longer have any late payments on your record. Credit scoring models view late payments as a sign of financial stress, so by removing them from your report, your score will increase.
Increases are common for people whose scores were already suffering from high credit card balances, collection accounts, and late payments. Several years ago, the Federal Reserve Bank of Philadelphia looked at pre-bankruptcy and post-bankruptcy credit scores for both Chapter 7 and Chapter 13 filers. The average score for Chapter 7 filers jumped more than 80 points. The increase was slightly smaller for Chapter 13 filers, but still significant.
Finally, filing for bankruptcy can give you a clean slate to start fresh with your finances. This can be a good opportunity to improve your credit score by making on-time payments and using credit wisely.
If you are considering bankruptcy, talk to a Nebraska bankruptcy attorney to learn more about how it will affect your credit score.
