A common concern that many people have when considering filing for bankruptcy relief is how filing a bankruptcy will impact their credit score. Many people think that a bankruptcy filing ruins your credit rating forever. While your credit score may be lower for a while, it is not permanent decrease in your credit score. In many cases, filing a bankruptcy case improves your credit score within a year of filing.
How Is Your Credit Score Calculated?
Your credit score is a combination of five factors:
• 35% payment history
• 30% amounts owed
• 15% length of credit history
• 10% credit mix
• 10% new credit
As you can see from the above information, your payment history and the amount of debt you owe make up over half of your credit score. Most people who file for bankruptcy have already damaged their credit score because of missed payments and too much debt by the time they make the decision to file for bankruptcy relief. The amount a credit score drops when a person files bankruptcy depends in part on the credit score at the time of filing. If you have a low credit score, filing bankruptcy won’t lower your credit score as much as someone with a high credit score. In either case, the damage is temporary, and it can be repaired in a short amount of time.
Can Filing Bankruptcy Help Improve My Credit Score? Actually, yes!
Filing bankruptcy helps improve the “amounts owed” portion of your credit score by discharging unsecured debt. The balances on the discharged accounts become zero which helps improve this portion of the credit score. In addition, creditors cannot continue to report late payments on debts that are discharged thereby helping to improve the payment history portion of the credit score. Month after month, the payment history improves without additional late payments being reported by creditors.
By not filing bankruptcy, you prolong the time it takes to improve your credit score. If you don’t pay your debts, creditors continue to report late payments and other negative information. Even if you begin paying the debt, the negative information remains on your credit report for years. When you stop creditors from reporting negative information, the steps you take to improve your credit score going forward count more than they would if they had to battle the continued reports of negative information.