When to File Bankruptcy for a Credit Score?
Bankruptcy usually hurts your credit score badly, but so do the financial problems that usually lead up to it, like defaulted accounts, charge-offs and creditor judgments. Bankruptcy stays on your TransUnion, Experian and Equifax credit agency records for a lengthy period, according to the Federal Trade Commission (FTC), but sometimes filing Chapter 7 or Chapter 13 is a positive move for your credit score in the long term.
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Definition
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Bankruptcy generally means a court filing to relieve you of debt when you cannot repay your bills. There are several varieties, according to the FTC, with Chapter 7 and Chapter 13 being the most common for consumers. Chapter 7 is a near-complete liquidation of your assets and discharge of you debt. Chapter 13 allows you to retain some assets and makes you repay some bills. Both are reported by TransUnion, Experian and Equifax for 10 years.
Effects
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MyFICO, the Fair Isaac credit scoring website, advises that bankruptcy has some effect on your credit score for the entire decade during which it appears on your credit reports, but its influence lowers over time if you offset it with good financial practices. You cannot start rebuilding your score while you are saddled with debts you cannot pay, and collection accounts and court judgments will pull you down further. Bankruptcy is a good option at that point because stops collectors and discharges some or all of the bills, allowing you to get new accounts and use them wisely.
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Credit Repair
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Filing bankruptcy gives you an opportunity to rebuild a good credit history. You do not get to start from scratch because lenders see the bankruptcy on your records, but you no longer are struggling to pay the old debts and the discharged accounts get purged from your files. MSN Money columnist Liz Pulliam Weston advises opening a secured credit card account by putting up funds as collateral. Keep the balance low, pay all payments on time and gradually open other cards or get a small loan. MyFICO explains that your score puts heavy emphasis on debt loan and repayment, so responsible credit use raises it quickly.
Considerations
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Your credit score usually drops after bankruptcy, but Aleksandra Todorova of the Wall Street Journal Smart Money site advises that some people actually see a minor increase. This happens when your credit is so badly marred by high balances, financial judgments, repossessions, foreclosures and other serious issues that the bankruptcy looks better once those items get wiped away. FICO also groups you with other bankruptcy filers when calculating your score, which helps you because you are not being compared to people with stellar credit.
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