DOES FILING BANKRUPTCY RUIN MY CREDIT?

Filing Bankruptcy ruins a person’s credit is not true if the person already does not have a good credit score. Most programs take several years to repair a credit score. I have seen some plans developed for my clients that are designed to take up to thirteen years to pay off the credit, then after that the person still has to rebuild the credit score. If a person continued in their current pattern of paying their bills late and/or not at all, the credit score would never improve, it would actually go lower.

It takes 7 seven years for a normal item to drop off of a credit report. Some things like judgments are always there and if a judgment is renewed it will remain collectable for a lifetime. Filing bankruptcy can actually help a person recover their credit life in as little as a year after filing.

Although the credit score formulas are trade secrets, it is known that three of the major factors are Debt to Income, Debt to Credit, Payment History. Debt to Income is the amount of a person’s income compared the monthly payments to service the person’s debt. Debt to Credit is the ratio of the amount of available unsecured credit available to the amount of unsecured debt owed. Payment history is the number of on time payments, late payments and missed payments a person has in the credit history file. Filing bankruptcy will not fix a person’s payment history prior to filing but it will stop the continued accumulation of late payments on debt the person cannot pay. The other two ratios are instantly set to zero when the debts are discharged in bankruptcy.

After filing bankruptcy and receiving a discharge, a person may begin to rebuild their credit score. The simplest way is to prove that the person is credit worthy according to the formulas used to develop the credit score. I recommend obtaining a secured credit card from a local credit union. A secured credit card is obtained by depositing money in a blocked account that the credit union holds as security against the credit that is issued with the credit card. If the person fails to make the credit card payment, the credit union closes the credit card and pays off the balance with the money in the blocked account. I recommend obtaining a credit card with a $500.00 credit limit. Most of the local credit unions require a $750.00 blocked account as security for the credit card. Most people will see a 100 point increase one year after discharge if the obtain a $500.00 credit card and carry a $300.00 balance and make the payments on time. Do not pay off the card every month because when the credit union reports to the credit bureaus, there needs to be the $300.00 balance. There is no guarantee that filing bankruptcy will fix a person’s credit but in many cases it helps. A person should seek competent legal advice before taking any legal action such as filing bankruptcy.