If you’re considering filing bankruptcy, you’re probably concerned about what will happen to your credit–and rightfully so. Credit scores may temporarily be trashed when a client files bankruptcy, but the real question to ask is–who cares?
Credit scores are based on the last 7-10 years of reporting information, but according to the credit scoring formula, things that happened in the recent past are weighted far more heavily than things that happened a long time ago. This is great news for the potential bankruptcy filer–your score may dip in the short term, but you can build your credit back quickly by opening new, positive credit accounts and letting that old stuff fade into the distance.
1. If you’re in the position to be considering bankruptcy, your credit score is probably on the brink anyway. There are alternatives to bankruptcy (working with debt management nonprofits or their more unsavory cousins, debt settlement and credit repair companies)–but anyone who tells you that these alternatives are gentler on your credit score is probably trying to sell you something. Once you have late payments, defaults and collection accounts on your credit, it’s hard to get them to come off, and paying off collection accounts actually doesn’t improve your score at all. Think about whether your credit score can be saved before you pay someone to save it.
2. I think it’s time you and credit take a little break from each other. If you’re considering bankruptcy, you’re probably not planning to take out a mortgage or open a bunch of credit cards in the near future, and so you probably don’t need to have a sky-high credit score right now. Your credit score may be a factor for renting apartments or finding new jobs, but having a recent bankruptcy may be less of a big deal to most people than if you haven’t resolved your issues and have a bunch of debt collectors clawing after you. Sure–you’ll need your credit to rebound eventually, but for now, explain your situation to a potential landlord or employer. If you’re honest and upfront, you’ll likely find that people are willing to overlook your earlier problems.
3. We have strategies for building back your credit. Remember, the recent past is much more important than the distant past when it comes to credit. The credit scoring models will reward you for opening new, positive credit accounts and paying on time every month. By stopping all new reporting on old accounts, bankruptcy cleans the slate so that your creditors don’t keep dragging down your credit score month after month.
Once you file bankruptcy, you’ll be inundated with new credit solicitations. But these offers aren’t the ones you want–they tend to be expensive and predatory. We can point you toward safe credit building products–credit building loans and secured credit cards–that will help you build your credit back up slowly and surely. We also meet with you at no charge six months after your bankruptcy to make sure that all the negative information that was on your credit report pre-bankruptcy was cleaned up the right way. If you build new credit and pay on time, banks will begin to consider you for low-interest car loans and mortgages as soon as a year or two after your bankruptcy.
If you want to know more about how bankruptcy may affect your credit score, get in touch with us.