What Filing For Bankruptcy Does to Your Credit Score

Contrary to popular belief and what the big banks and credit card companies tell you, filing bankruptcy improves credit. The reason is simple, when we eliminate the debt owed, essentially we’re clearing out all the debt and when the debt is gone, the credit score goes up. Now, the actual filing of the bankruptcy case itself might cost a few points on the credit score, but it’s usually offset by wiping out the debt.

Like most folks today, you’ve done your share of research on the internet, yet you’re still not entirely certain how a bankruptcy case affects your credit. My guess is that the answers you find depends on who is doing the talking. Creditors and banks will tell you that filing bankruptcy is the worst thing for your credit and they’ll convince you to do everything you can to avoid it, but why are they telling you that?

Consider the fact that those same banks were “too big to fail” during the Great Recession of 2008. It’s also the big banks that got their lobbyists to fight for the changes to the Bankruptcy Code back in 2005 too. Some of those big credit card banks want to know “What’s in Your Wallet?,” because they want you to carry their credit cards there.

These big banks want you to fear bankruptcy like the plague because they get to charge you interest for the entire time you carry a balance on their credit card. If you filed for bankruptcy, they would lose and you would win. Now, if you’re like many of my clients, you likely feel a moral obligation to repay your debts and I can certainly appreciate that. However, the Constitution of the United States, the Bible, and the Bankruptcy Code all provide for the release from debts.

Keep in mind that the bankruptcy case will stay on your credit report for 10 years if you filed under Chapter 7, and Seven years if you filed under Chapter 13 of the Bankruptcy Code. Also, you can obtain credit easily after bankruptcy, but I’m biased on credit and debt after bankruptcy because I see cycles and patterns in debtors having trouble managing debt after bankruptcy when their budgets have no room for it. I know of at least two non-standard credit card issuers, Merrick Bank and Orchard Bank will issue credit cards to folks immediately after filing bankruptcy.

Remember that no one ever go rich off credit cards and your credit score only tells others how well you manage debt. If you’re out of bankruptcy, improving your credit requires a few things. Keep no more than 4 accounts open at any time. This can be any combination of mortgages, student loans, and credit cards. Do not charge more than half of the available credit line and pay off the card every month. After about five years past your bankruptcy case, you should be able to obtain the standard bank credit cards again. I hope this information proves helpful to you and wish you much financial success.