What will filing for bankruptcy do to your credit score?

It may sound obvious but most people contemplating bankruptcy are behind on their bills, and have rapidly deteriorating (or bottomed-out) credit scores.

But everyone who contemplates filing a bankruptcy case is entitled to consider what impact the case will have on their lives going forward.

When it comes to credit scores, there are a lot of myths out there. Part of that is due to the general secrecy that surrounds the exact formula for computing these numbers, and part of it is the general human tendency to spread information regardless of whether it’s true or not.

So here, as a sort of public service, is an article by Mark Greene, the CEO of Fair & Isaac, which is the company that owns the formula for generating the scores in the first place: FICO Questions Answered.

As you can see from the article, a bankruptcy case will typically result in a 150 point “hit” to your score. This isn’t always the case: since the scale bottoms out at 300, debtor’s with truly awful scores to start with should have little fear about filing.

Greene also says in this article that it might take as long as seven years to rehabilitate one’s score after filing a bankruptcy case. While this may be true, debtor’s should realize that they may not need to fully rehabilitate the score in order to get credit.

A better guide is to think about what will the score be one year after a bankruptcy case is filed. Often the FICO score has risen enough by then for a debtor to get some credit offers. Maybe not a $300K mortgage, but debtors who stay on the narrow path and pay their bills after the case is filed should be OK generally.

Another factor to consider is that all of this can change at any time. Here in the Lawrence – Methuen, and Haverhill areas, though, my bankruptcy clients have generally started receiving new credit offers in about six months to one year after the filing of their Chapter 7 bankruptcy case.

 

By Doug Beaton

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