How Your Credit is Affected After Bankruptcy
The answer may surprise you
Many people think that that following bankruptcy their credit scores will go down. However most people find that bankruptcy improves their credit scores, especially over time.
The credit score of a bankruptcy filer is usually relatively low at the time of filing. He or she probably has been in financial distress for some time, and the credit score will have already reflected late and missed payments, high outstanding balances, and accounts in collection.
If bankruptcy were to lower an already low credit score, it would probably have little effect on the individual. However, the benefits of bankruptcy usually result in an immediate increase to the individual’s credit score, although the increase is initially modest.
Following bankruptcy, your credit report is updated to reflect those debts that were discharged. Thus, those high balances are gone. The record of late and missed payments is gone and there are no accounts in collection. Thus, you may see a small increase to your credit score.
Another reason that your credit score might show an immediate improvement following bankruptcy has to do with how your credit score is determined. The most prevalent calculation is known as a FICO score. While parts of the formula are proprietary, it is generally known that consumers are ranked among various groups, one of which is bankruptcy filers. So your post-bankruptcy credit score takes into account your comparison with other bankruptcy filers, not those with stellar scores.
What you can do to improve your credit rating following bankruptcy
There are several ways you can improve your credit score in the months following bankruptcy, including:
- Obtain new credit cards — In the beginning, if your applications for credit cards are declined, obtain a secured credit card. Similar to debit cards, secured credit cards require you to deposit money in advance into your account. The amount of money you have in the account serves as your credit limit. Be sure to make regular and timely payments and within 12 to 18 months you should be able to qualify for unsecured credit cards.
- Check your credit report for inaccuracies — You can obtain copies of your credit reports from Experian, Equifax, and TranUnion for free from www.annualcreditreport.com. (This is the only source for free annual credit reports authorized by the Federal Trade Commission.) Verify that all the accounts that were discharged in your bankruptcy are shown as discharged. If any are still showing as delinquent, report the error as that error has a negative effect on your credit score.
- Let a friend or relative’s good credit history help you — As a strategy to help you regain a good credit rating, ask a friend or relative with a good credit history to allow you to become an authorized user of his or her credit account. We are not suggesting that you actually use that account for making purchases. Rather, we are simply suggesting that you become listed as an authorized user because your bankruptcy will not adversely affect your friend or relative’s credit report, but his or her good credit history becomes part of your credit report and helps to improve your credit score.
- Buy a car — While a bank or credit union would likely deny an auto loan soon after bankruptcy, dealership financing may be available just a few months after bankruptcy. Making timely payments on an auto loan is a good way to help improve your credit score.
An experienced Brooklyn bankruptcy lawyer fighting for you
If you live in New York City and think bankruptcy may be a viable option for you, contact the Law Office of Gregory Messer online or at 718-717-2368 to schedule a free initial consultation. Our office is located across the street from the U.S. District Bankruptcy Court in Brooklyn and is close to the Borough Hall and Court Street subway stations. We serve residents throughout Brooklyn, Bronx, Manhattan, Staten Island and Long Island.
To ensure every client’s filing receives the attention it deserves, we are an appointment-only law firm with flexible hours adjustable to fit your needs.