05 Sep Bankruptcy & Credit Scores: Why a Bankruptcy May Not be as Bad as You Think
Part 3 of 4. When people consider filing for bankruptcy, one of the most common issues that give them pause is the knowledge that the bankruptcy filing will “ruin” their credit score. While it’s true that filing for bankruptcy protection will lower your score significantly, it’s not nearly as bad as popular belief holds. Let’s take a look at why.
Debts, Late Payments, and Your Credit Score
While credit scoring companies keep their methods secret, there are occasional glimpses behind the curtain that reveal how much damage bankruptcies and other credit mistakes cause.
Several years ago, FICO released details about “damage points,” or how much credit scores suffer when a borrower makes a mistake. For example, if you have a great credit score (780 or higher), a single 30-day late payment can lower it by as much as 110 points. On the other hand, if you have an average score of about 680 to 720, a single 30-day late payment can lower it by as much as 80 points.
Accumulated Late Payments, Bankruptcy Protection, and Rebuilding Your Score
People who file for bankruptcy want to get a fresh start, and be free of the constant stress of worrying about late payments, debt lawsuits, and calls from collections agencies. The reason bankruptcy isn’t as bad for your credit score as you might think is because the damage done to your score by the other factors related to your debt problems is usually a lot greater than that caused by filing for bankruptcy.
For example, let’s say you’re considering filing for bankruptcy because you have far too much credit card debt. Over the past several months you’ve maxed out your cards (minus 10 to 45 points each card), made numerous late payments (minus 60 to 110 points each late payment) and have settled one of the card debts (minus 45 to 125 points.) All of those problems have, in total, probably reduced your score by hundreds of points.
A bankruptcy filing, on the other hand, will lower your score anywhere from 130 to 240 points, or roughly the equivalent of making 2 or 3 late payments. Though the bankruptcy will stay on your report for up to 10 years, you can begin rebuilding your score as soon as you complete the bankruptcy process. Also, after the bankruptcy is completed, you won’t have to worry about more late payments, debt lawsuits, or the other problems that decimated your score in the first place.
Bankruptcy as an Option
If you’ve thought about bankruptcy but worry about the effect it will have on your credit, your fears are probably overblown. In many situations, the damage your debt problems are already doing to your score are much worse than the damage the bankruptcy will do. You should always reach out to an experienced bankruptcy attorney if you’re struggling with debt and need sound advice about your options. If you are located in North Carolina, you can call our office at 919-313-4636 for a free consultation.
In our next post, we will talk about ways to rebuild and improve your credit score.