Can bankruptcy help my credit score?

Declaring bankruptcy can really harm your credit score, but over time, it may also help it. That depends on what your score is at the time you file the bankruptcy and what other financial circumstances are in play.

Credit scores are a snapshot of your credit history and a predictor of whether or not you may default on a loan. Creditors use your credit history to decide whether or not they are going to loan you money and if so at what interest rate. In fact, FICO, originally Fair Isaac and Corporation, scores are used in over 90 percent of U.S. lending decisions.

FICO scores range from 300 to 850 and are based on your debt payment history, how long you have had credit, your different kinds of credit, whether or not you have new credit and how much debt you are carrying.

Filing for bankruptcy can have an immediate impact on your credit score. That said, how it affects your credit rating may not be well understood since credit scoring changes, the credit rating companies do not share their formulas and each credit rating company uses different criteria to rate a person.

If you have a high score and declare bankruptcy, your score is likely to drop quite a bit due to the fact the higher your score the greater the drop if your file for bankruptcy. Those that already have a low credit score may see an increase in the score once the bankruptcy has been finalized.

Filing bankruptcy can help in several ways. For instance, getting delinquent account reports wiped out. Debts discharged in bankruptcy cannot be reported as delinquent. This may boost a low FICO score.

Another way bankruptcy can help is to improve your debt-to-credit ratio. This means that the money you owe on account makes up 30 percent of your FICO score. It indicates the percentage of the available credit being used and declaring bankruptcy can improve the debt-to-credit ratio. Put another way, the lower your debt (after it is wiped out) the higher your FICO score could be.

Once debts have been wiped out, you then have the chance to start building a solid foundation to a good credit history. It is best to consult with a skilled bankruptcy attorney at Placidi, Parini, Grasinger & Page to find out which Chapter to use to declare bankruptcy, how to do it, when to do it and how to recover after your bankruptcy has been discharged.

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