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Bankruptcy & Your Credit Score

The current economy, along with the weak housing market has left millions of Americans subsidizing their incomes with their credit cards.  This is causing mounds of debt to be accrued for many people, with no way to get ahead financially.   It’s no surprise that the number of people filing for bankruptcy is up, and rising.  1.41 million people declared bankruptcy in 2009, up 32 percent from 2008 according to The Wall Street Journal.  Bankruptcy is not something to be afraid of, however, it is a process that should not be made lightly.  Having a good bankruptcy attorney will make a world of difference.  A good bankruptcy attorney can help you to decide if filing bankruptcy is right for you, and they can answer your bankruptcy questions.  A common question that I am asked frequently as a bankruptcy attorney is: how will bankruptcy affect my credit score?  According to a survey conducted by Consumer Federation of America and Fair Isaac Corporation, close to 50 percent of American do not understand what the purpose of their credit score is.  Having a good understanding of what your credit score is, and why it is important will help you to decide if declaring bankruptcy is in your best interest.

How Lenders Use Your Credit Score

Lenders look at your credit score as a gage to extend or deny you credit.  Your credit score will determine if you get a small loan, or a large loan, and it will also affect your interest rate on that loan.  Basically, if you have a poor credit score you probably won’t receive as large of a loan as someone would who has a good credit score, and your interest rate will most likely be higher.

How Your Credit Score is Calculated

Developed by Fair Isaac, the FICO score is the most commonly used formula to determine a person’s credit score.  To calculate your credit score, Fair Isaac uses 22 pieces of data from the three major credit reporting agencies; TransUnion, Experian, and Equifax.

The five data points used to determine what your credit (FICO) score will be are:

  • Your payment history = 35 percent of the rating
  • What is you current debt = 30 percent
  • The length of credit history = 15 percent
  • Any new credit = 10 percent
  • What types of credit have been used = 10 percent

How Bankruptcy Affects Your Credit Score

It is common knowledge that bankruptcy will leave a negative mark on your credit report.  However, what most people fail to realize is that having a year of delinquent payments, and not paying your mortgage for a year leaves a negative mark too.  Many times people put off filing for bankruptcy for months, and even years.  All the while, they aren’t able to make their payments, and their credit score if suffering.

For example, a mortgage payment that is 30 days past due can drop your credit score anywhere from 40 to 110 points.  If your mortgage payment is 90 days late, that can cause your credit score to fall 70 to 135 points. Most people considering bankruptcy have already had their score drop substantially from not making timely payments, the bankruptcy filing itself therefore often has little impact on the fico scores of those individuals taking much (if not all) the downside away from filing bankruptcy.

Rebuilding Your Credit Score After Bankruptcy

Rebuilding your credit score after filing for bankruptcy is always possible.  Within a few months of filing for bankruptcy, you will likely receive credit card applications.  You will have the opportunity to rebuild your credit by getting a small credit card, and keeping everything paid on time.  At McFarlin LLP, we have guided thousands of people in rebuilding their credit after declaring bankruptcy.  There are a few important steps to take after filing for bankruptcy to start to rebuild your credit.

McFarlin LLP Can Help

Filing for bankruptcy can be the start of your new financial future.  If you have been struggling to make payments, or have several delinquent accounts, it might be in your best interest to file for bankruptcy.  Contact us today for a free consultation to discuss your options (888) 728 0044.