Taking Away the Mystery

There is a somewhat common rumor that bankruptcy will absolutely ruin someone’s credit score. The rumor goes on to claim that the devastation from filing bankruptcy is so enormous that you will never be able to get credit ever again.  With such a vicious rumor that has been around for decades, it’s no wonder that the most common question clients ask is, “How badly will my bankruptcy hurt my credit?”

Full disclosure: filing for bankruptcy will most certainly have a negative effect on your credit score, but chances are you will be surprised how soon you end up bouncing back. You will also likely be surprised how well bankruptcy will help you get your financial situation back under your control.

It’s a fairly regular occurrence that a person who is thinking about filing bankruptcy as probably already had a damaged credit score from whatever debts that pushed them to file bankruptcy in the first place. By this point, a good portion, if not all, of their creditors have reported negatively at some point and probably are still doing so; which of course results in a damaged credit score.

It’s true that your credit score will be damaged by filing bankruptcy, but often times that simply stop the bleeding because as soon as your case is filed, your (unsecured) creditors must stop accruing interest and all your creditors must stop reporting to the credit bureaus.

There are many factors involved in the calculation of your credit score, the precise formula of which is practically a secret. Be that as it may, a substantial portion of your credit worthiness is derived from what is called the “debt to income ratio.” A millionaire, for instance, with over a billion in debts is a risky borrower because even though they have considerable wealth, they have even more debt.

Before filing bankruptcy there is much more debt than income can cover; whereas after bankruptcy it flips and you have more income than debt.