The decision to file for bankruptcy, while usually the right one, should be based on the answers to logical questions about the state of your finances and the pros and cons of bankruptcy. Unfortunately, some of these answers are not as apparent as you may want them to be. Many people want to know whether or not filing for bankruptcy will repair their credit scores; depending on the source, the answer may be yes or no, which can be frustrating for the potential client seeking information. The answer may not be the one you want to hear, but the solution is one that most people find acceptable and useful.
THE REASON FOR CREDIT SCORES
In order to understand how bankruptcy interacts with your credit, it is important to understand why people look at your credit score. It is not some vague number based on arbitrary criteria; instead, your credit score is a measure of an individual’s or couple’s willingness or ability to pay back money borrowed. This is useful to lenders, for example, who will run your credit and use it to decide whether or not you are a good candidate for a home loan. It is also useful if you want to apply for a credit card or small business loan. If your credit score is low, or you have no credit at all, it is assumed that you are not trustworthy; this may not be true, but it is important to have healthy credit for exactly this reason.
How Bankruptcy Affects Credit Scores
Filing for bankruptcy will help you solve your immediate problem, which is unmanageable or overwhelming debt. Remember that credit scores measure how well you can pay off your debts; if you must file for bankruptcy, it will most likely lower your credit score. This is unavoidable. However, this is not necessarily a bad thing. Bankruptcy will not lower your credit score detrimentally, and it certainly won’t ruin your credit. In fact, filing for bankruptcy may actually help you save your credit! How is that possible? Simply, you can save your credit by filing as soon as you notice a problem and making smart choices once you have filed.
Saving Your Credit
If bankruptcy lowers your credit score, then how can it also help save your credit? It may seem counterintuitive, but it all depends on how you handle the situation. By definition, unmanageable debt is that which cannot be managed by an individual without legal help. Mismanaging your debt will lower your credit score. If you file for bankruptcy, your score goes down a certain amount of points, but once it has lowered, it does not continue lowering unless you accrue more debt. Simply letting your debt pile up, however, will continue lowering your score until it is barely salvageable. Recovering from bankruptcy is much easier than recovering from that kind of severe damage! If you have a good post-bankruptcy budget and plan, you should be able to fix your credit score within an agreeable amount of time.