You have significant debt and you struggle to pay your bills each month. While you have considered a bankruptcy filing, you have concerns about the negative impact of bankruptcy on your credit score.
In fact, sometimes bankruptcy may actually increase your FICO score over time. Learn more about the ways that filing for bankruptcy could improve your credit profile.
Creating a favorable debt-to-credit ratio
This number describes the amount of credit you have available relative to your total debt. Debt-to-credit ratio represents about 30% of your credit score. With a high ratio, banks will be hesitant to loan you money because you already have significant debt. After filing for bankruptcy, you will instantly have a lower debt-to-credit ratio after receiving a discharge of your eligible debts. To amplify this effect, rebuild your credit by applying for a credit card after bankruptcy and repaying your balance in full each month.
Removing delinquent accounts
While your bankruptcy will appear on your credit report for seven to 10 years, the eligible debts will disappear from your credit report. If these accounts had high balances and late payments, your credit score is probably already fairly low. In this case, the removal of these past-due accounts provides a clean slate on which to rebuild your credit. In some cases, you may even see your score increase right after you file for bankruptcy.
Making room for improvement
While bankruptcy remains on your credit report for up to a decade, that does not necessarily mean you will have a low credit score for years to come. In fact, taking steps to build healthy credit right after you file can significantly improve your score over time. If you cannot qualify for a new credit card right away, opt for a secured credit card and use no more than 30% of your total available credit. Make on-time payments for any new credit accounts you obtain. As you take these steps, your FICO score will begin to climb.
Every situation is different. However, for many people who cannot repay overwhelming debt, bankruptcy can provide the catalyst for an improved credit score and a more positive overall financial future.