HOW WILL BANKRUPTCY AFFECT MY CREDIT SCORE?

This depends on a variety of factors, including what your score currently is, what chapter you file for, and if you successfully complete your bankruptcy.  While filing for bankruptcy may lower a credit score, it will not necessarily do so. In fact, if you already have a low credit score, filing can actually increase your score, especially after successful completion of a Chapter 13 or Chapter 11 bankruptcy plan in which you pay off some of your debt. Chapter 7 bankruptcy can also, in certain instances, increase a low credit score, after successful discharge.  It is also important to know that you can always re-build your credit after bankruptcy, and ANAND LAW can guide you on how to do so.

In order to understand the unpredictability of how bankruptcy may affect your credit score, it is helpful to understand how credit scores are calculated.

CALCULATION OF YOUR CREDIT SCORE

Credit bureaus (also known as “credit reporting agencies”) act an intermediary between consumers, businesses and lenders.  The credit bureaus collect data from various sources, and then use this data to create your credit score.  The bureaus use third-party companies, each who employ their own methodology, to calculate these scores.

THE MAJOR CREDIT BUREAUS AND SCORING AGENCIES

There are dozens of credit reporting agencies, but the three national agencies that a majority of lenders and businesses use are Experian, Equifax, and Transunion.  Similarly, there are many credit scoring companies, but the two most common are FICO and VantageScore.  Experian Equifax and Transunion came together to create VantageScore, and all continue to use them to generate credit scores.

The credit scores are based on how the various data collected interacts with each other.  There are approximately 220 million consumers that credit reports have been created for, and approximately 36 billion pieces of credit data utilized in credit reports every year to create the credit scores (source: VantageScore).

The exact methodology used is complicated and uncertain, but factors include: payment history with lenders, banks, and credit card companies; amounts owed; length of delinquencies; length of accounts in good standing; and, types of credit being used.  Scores from each bureau may differ for a variety of reasons, including the timing of the data provided.

IMPROVING YOUR CREDIT SCORE

Regardless of the credit bureau (e.g., Experian, Equifax, or Transunion), or the scoring agency (e.g., FICO or VantageScore), you can improve your credit score, no matter how bad it is, and no matter the reason for it being low (whether due to bad payment history, repossessions, judgments, liens, foreclosure, or other).  In general, you can improve your credit score by using credit (e.g., through a credit card, line of credit, or loan), and paying bank all use of that credit on time.  The longer you consistently pay on time, and the higher the amount of credit being used, the better your credit score will be.  You can re-establish your credit even after repossessions, judgments, liens, or foreclosure by maintaining a pattern of using credit and repaying the lender timely.  There are lenders willing to extend credit to nearly anyone, regardless of their score, and even lenders that extend credit to individuals in active bankruptcy proceedings.  However, it is important to note that, in general, the lower your credit score, the more it will cost to obtain the credit (i.e., the higher interest rate you will receive)–this makes it even more critical that you pay on time.  The bottom line is that it is not hopeless–with some patience and organization to manage your finances, you can re-establish and build your credit score.