If you’re considering bankruptcy, you may be asking yourself: how does filing bankruptcy affect credit score?
While filing bankruptcy in California may impact your credit score, you might be surprised to learn that it may not necessarily have a negative impact! If your debt-to-asset ratio is high, for example, filing bankruptcy will actually help your credit score in the long run.
For anyone filing or considering filing bankruptcy, read on to learn more about how it will affect your credit score and what you can do to keep it as high as possible.
What is a Credit Score?
When you apply for credit via credit cards, auto loans, a mortgage, or student loans, the lender will first look at your credit history to decide if you are financially stable enough to repay the loan. Most likely, the lender will use a FICO score in making their decision. If your FICO score falls in the mid 700s or above (good credit), you should not have a problem securing a loan. However, if your FICO score is low, the lender may ask you to make a hefty down payment before obtaining the credit.
Your credit score is determined by the following factors:
- Payment history of debts
- Outstanding debts
- Credit history length
- Existing new credit
Will Filing for Bankruptcy in California Impact My Credit Score?
Depending on the nature of your outstanding debts, your credit score may or may not be affected by filing bankruptcy. For example, if you are delinquent on several accounts, your credit score will likely be low prior to filing and may not be affected. On the other hand, if you have spotless credit and a high FICO score, it may decrease significantly upon filing bankruptcy.
How to Repair Your Credit Score After Filing Bankruptcy
Once your bankruptcy petition is granted, you should obtain a preliminary credit report to catch any existing errors and further understand your “starting” score. This way, you will be more prepared to repair your score after filing bankruptcy, should it decrease in the process.
While debt payment history makes up 35% of your score, you obviously can’t turn back time and change your payment history. However, you can start repairing your credit score immediately following bankruptcy by reducing your debt-to-income ratio.
Outstanding and added debts
Filing bankruptcy will help you reduce and/or eliminate most existing consumer debts. However, for all future debts incurred following your bankruptcy petition, you must remember to keep the numbers low and pay your bills on time. Avoid taking on more debt than you can handle in order to keep your payments reasonable.
Old and new credit
If you get a credit card after filing for bankruptcy, make sure you pay it off every month, and do not close any of your old accounts in its place. Closing existing accounts reduces the amount of credit you have available, thus lowering your credit score.
In order to avoid overspending, consider destroying your credit card or obtaining a low-limit secured card to avoid overspending. Remember that most banks will offer low-limit credit cards or secured credit cards to people who have filed bankruptcy.
Check your credit report on an annual basis
Each year, obtain a credit report from all three credit reporting bureaus: Experian, TransUnion, and Equifax, as each bureau will report different information. Upon receiving your reports, review the information to ensure accuracy and consistency among any debt owed according to each bureau. If any of the information is inaccurate, you will have to contact the reporting agency to correct the report. Be sure to make a detailed list of all discrepancies and attach any supporting documents to your letter to the agency.
We hope you found this article helpful. A People’s Choice provides legal document preparation services to residents of California, however we no longer prepare bankruptcy documentation.