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How Bankruptcy Affects Your Credit

One of the most common questions we are asked here at Bankruptcy Law Professionals is about how the bankruptcy will impact your credit. Over years and years of experience, we can confidently state that in most of our bankruptcy client cases, the overwhelming long term result is an IMPROVEMENT of credit score. You read that right. Most people are able to improve their credit scores after a bankruptcy. So, how is it possible that a bankruptcy can improve a credit score? There are several factors involved. Here’s how it works.

Usually, the main purpose of a bankruptcy is to discharge debt. When all of your debt is discharged, your debt to income ratio changes for the better. You may still have some secured debt like auto loans or mortgages to maintain, but, in most cases, all of your unsecured debt will be discharged. This becomes a drastic advantage to your credit profile. Now, you can start over and begin improving your credit again.

We can illustrate further by an example scenario with a fictional client named Codi. Codi had a 650 credit score with $50,000 of unsecured debt. He has several late payments on his credit report which is the reason his score is 650 instead of 700+. After he filed for bankruptcy, his credit score immediately went down to 550. (Sidenote: A high credit rating will typically be impacted more from bankruptcy than a low credit rating) It took him 3 months (fairly standard) to reach his discharge and closure of the bankruptcy file. Within a year, Codi was able to replenish his credit score to 700 by maintaining a great payment history and a perfect credit record. Codi is now relieved from his $50,000 unsecured debt load and has a 700 credit score.

This is a realistic scenario. We have had real clients call us with this exact same result. Your result may not be exactly the same, but it is certainly possible. A major factor involved is the past negative marks on your credit report. The quantity of past due payments and other negative marks on your credit score will determine how quickly your credit can recover.

Now we can take a look at what would have happened to Codi if he didn’t file for bankruptcy. Let’s assume the most positive scenario where Codi secured a great new job making $60,000 per year and started to use his income to pay down his debt. It takes Codi 5 years to pay off the $50,000. His credit score slowly begins to improve as he is paying off the debt. After 5 years, the debt is cleared and Codi now also has saved an extra $15,000 in savings after he paid off his debt. Pretty good right?

Let’s now look at what would have happened 5 years later if Codi secured this same job of $60,000 per year and he used a bankruptcy to discharge the debt. The results are very different. Since Codi discharged the $50,000 of debt in the bankruptcy, his savings total is now $50,000 + $15,000 = $65,000. Since Codi’s debt to income ratio is excellent and he has been maintaining excellent credit habits, his credit score has been up at 700+ for several years now. He now has the money to buy a home and has the credit profile to get a low rate home loan. Much better than without a bankruptcy right? The difference is significant. Without a bankruptcy, Codi has a good credit score, no debt, and is starting to save money. With a bankruptcy, Codi has had a great credit score for 3-4 years, no debt, and has wealth and savings to buy a home.

Bankruptcy Law Professionals has Riverside bankruptcy attorneys and Orange County bankruptcy attorneys to help you. Our competitive pricing has no compromises to excellent customer service. Contact us at Bankruptcy Law Pros at 855 257-7671 to see what your options are. We offer FREE consultations by phone or in-person.

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