How Bankruptcy can improve your Credit Score

File for bankruptcy protection is not an easy decision to make. There are many concerns that come to mind when thinking of how bankruptcy will affect your life, and chief among them are afraid that your credit rating will be so damaged, you will not be able to secure any credit, even at terrible rates ever again. 

But here is some interesting information - in many cases damage to your credit score is not nearly as dire as expected. Over time, you can much improve your credit score after a bankruptcy may make you eligible for more loans in future. 

One of the reasons your score will not be seriously affected, is that if you are in such dire circumstances, even consider filing for bankruptcy, then chances are you do not have a stellar score to begin with. 

After filing, some consumers may even see a slight bump up in their credit score. And it is because the credit report, which largely wiped after a bankruptcy. Their high balances are removed and any late payments or records of unpaid debts. All accounts in your bankruptcy will be listed as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 wage earner plan", depending on what type of bankruptcy you filed. 

Of course, you probably do not see a big boost, but if you just have to get by or not to pay bills at all, your credit is unlikely to fall much further. 

But a bankruptcy could contribute to improving your score in the long term. The reason When calculating points, FICO formula used to calculate credit scores is set up to gauge consumer's creditworthiness relative to other consumers in a similar financial situation. To do this, divides consumers into 10 groups, using what it calls "score card." Then holds consumers in each group based on the others in the group. One of these score cards is bankruptcy filers. (For competitive reasons, Fair Isaac does not release what amounts to all 10 groups.) 

  

In other words, when you file for bankruptcy your score is determined by how you do compared to other bankruptcy filers, 

As a result, credit scores run gamut among bankruptcy filers. "In this population, you'll find some consumers who have very good FICO scores, some who have very bad FICO scores, and in between," Watts says. (Fair Isaac has no statistics on the average FICO score for bankruptcy filers.) Granted, you will not be able to bring your score up to the perfect 850 as long as your bankruptcy stays in your report, but with good credit management after filing is a score in the 700s is not impossible. 

Then again, your credit score alone does not affect whether you decide to file for bankruptcy. Most experts will still say that if you can dig your way out of debt without declaring bankruptcy, it is a better way to go, because, among other things, you may be forced to sell some assets - in some states even your home or car - to meet bankruptcy reporting requirements. (This may be the case with Chapter 7 bankruptcy, not Chapter 13). Another problem: Because the tougher new bankruptcy rules, you can not even be able to declare itself bankrupt. 

That said, if your debt payments crushes you, bankruptcy will give you a much needed fresh start. And with a few smart credit repair strategies, can your score be back in the 700s within two or three years.