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Does Bankruptcy Ruin Your Credit?

Loan companies like to frighten potential bankruptcy candidates with warnings about bankruptcy “ruining your credit” for 20 years or so into the future. However, the truth is that by the time most people file bankruptcy, their credit rating is so low that the bankruptcy itself does little additional damage. In fact, bankruptcy may actually help you to get credit sooner, since lenders are anxious to loan to people who are ineligible to file bankruptcy for the next five to seven years.

What Does Bankruptcy Do To My Credit Rating?

Depending on what your credit rating was prior to the bankruptcy, your filing may cost you a little or a lot on your credit score. In order to understand this, it is important to understand how credit scores are calculated. The “Big 3” credit scores are compiled by three widely-recognized agencies: Experian, TransUnion and Equifax. Most creditors use at least one or sometimes a combination of scores from these three companies in order to rate an applicant’s creditworthiness. This number, which ranges between 300 and 850 for most creditors, is made up of many factors, including the number of open accounts, how close to the credit limit those accounts are, how long you have had the accounts, and the number of late payments you have had as well as collections actions against you. How much bankruptcy will hurt your credit score depends on how low your score already is. If you have a score of 780, considered “good” to “excellent” by most creditors, you will probably lose about 240 points. If your score is 680, considered “fair,” you may lose about 150 points. Either way, your final score should be somewhere in the 530 range. If your credit score is already in the 500s, you have little to lose from bankruptcy in immediate damage to your score.

What About the Long-Term?

The problem for most debtors with credit scores is the long-range picture. How long will bankruptcy keep your credit score low? That depends in large part on what you do following your bankruptcy. If you open several new accounts, immediately charge them to the limit and then make late payments, your score will not rise. If, however, you judiciously use your available credit, you can build a credit score that will allow you to purchase a car, a home or other items in the reasonably near future. For more information on filing bankruptcy, contact the attorneys at the Oswalt Law Group in Phoenix.  

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