One of the most common questions I am asked when sitting down with a client is, “How will this affect my credit?” The common myth is that a bankruptcy will ruin an individual’s ability to obtain credit in the future. While the filing of a bankruptcy will have an effect on your credit, many of my clients find themselves pleasantly surprised at how quickly they bounce back, and at how bankruptcy helps them get their finances back in order.
In the majority of cases your credit score has already taken a hit from the debt obligations which you have been unable to pay (payday loans, personal loans, vehicle payments, mortgage, medical bills, credit cards, etc.) Falling behind on these obligations will cause your credit score to take a plunge, however most of my clients find that the filing of a bankruptcy can stop the bleeding. Once the bankruptcy is filed, your creditors are no longer able to report your pre-filing behaviors to the credit bureaus. This means, that the negative reporting ceases immediately.
While the formulas the credit bureaus use to calculate an individual’s credit score are a closely guarded secret, it is common knowledge in the credit industry that a considerable portion of your credit score is made up of your outstanding debt. Many times you hear this referred to as your debt to income ratio. This value depicts an individual’s ability to repay a loan. With a host of outstanding bad debts, your borrowing future is limited; however upon your bankruptcy discharge your old outstanding debts are gone, thereby allowing you to incur new, and more productive, debts.
A lot of my clients are shocked when they begin to receive credit card and vehicle offers soon after discharging their bankruptcy. This is typical, and is a result of the credit industry viewing you as a good bet. After all, you have just completed credit counseling, financial management, and are not eligible for another discharge for at least four years. Typically your credit score after bankruptcy will be better within a year, than before the bankruptcy.