Can Declaring Bankruptcy Help My Credit Score?

Can declaring bankruptcy help my credit score? There is no fixed answer to this question. It depends on many factors. But in some cases declaring bankruptcy might actually help your credit score.

Effect of bankruptcy on your credit

Bankruptcy can remain on your credit for years. Generally, a chapter 7 bankruptcy will appear on your credit for 10 years while a chapter 13 bankruptcy will appear on your credit for 7 years. Your credit score is generated from the information appearing on your credit report. Since bankruptcy will appear on your credit report, you credit score will be negatively affected. Bankruptcy can lower your credit score by 100 or more points. Often by the time you file for bankruptcy, your credit score has already sunk to the point that a bankruptcy does not make it much worse.

Bankruptcy can have a positive effect on your credit

Generally people expect bankruptcy to ruin their credit. But that is not always true. The effect of a bankruptcy on your credit must be determined in comparison to your present credit rating.  Sometimes bankruptcy can have a positive affect on your credit score. When your debts have been discharged in a bankruptcy, the debtors no longer have a claim against your future income. So you will emerge more credit worthy post bankruptcy. Federal law requires credit reporting agencies to report the balance of each discharged debt as zero.

Positive affect in the long run

In the long run, bankruptcy can actually help your credit. The method used to calculate your FICO score requires that your credit standing be graded on comparison with that of others in a similar financial situation. Bankruptcy filers are clubbed together. So when calculating your FICO score your credit is compared with other bankruptcy filers. You will not be compared with persons having excellent credit. Amongst the bankruptcy filers, there can be people with high FICO scores, some in between and some with very low scores. So it is possible that by declaring bankruptcy, your credit score might actually improve. If you have an income, lenders will be willing to offer you credit at favorable terms because bankruptcy has discharged all your past debts and your income can be used to repay them.

Getting legal help

Even if declaring bankruptcy does not help your credit score, there are steps you can take to improve your credit score post bankruptcy. Consult with an experienced bankruptcy attorney. The attorney can advise you on whether declaring bankruptcy can help your credit score.