What if we were to tell you filing bankruptcy could be the best thing you can do for your credit score?
The Motley Fool recently reported the consequences of filing bankruptcy, including the fact that a discharged bankruptcy can remain on your credit report for up to 10 years. During that period, the article notes, you might struggle to get a mortgage or car loan, or rent an apartment. Motley Fool reports 500,000 Americans file bankruptcy each year, with medical bills being the most common cause.
The Truth About Bankruptcy and Credit Scores
FICO, which is the most widely used credit-scoring model in the U.S., bases more than two-thirds of your credit score on how much you owe and your payment history. New credit and your overall credit are factors accounting for another 20 percent of your score.
A single late payment can lower a good credit score by 60 points or more. If you are missing or making late payments, carrying high balances on your cards, or jumping from credit card to credit card, your credit score is already low. On a scale to 850, a good score is 700 or higher. Those with a few missed payments or high levels of credit card debt are already in the Fair category (650) or below.
Yes, filing for bankruptcy will drop your score 100 points or more overnight. But the reality is that if you’re in a position to need to file for bankruptcy, you are in position to absorb that loss. A drop from 600 to 500 is almost meaningless in the credit world.
Bankruptcy and Consumer Protection in South Carolina
The truth is most people do not seek the advice of a bankruptcy attorney in South Carolina until long after they are over their heads in debt. Yet bankruptcy is among the most significant consumer protections we all enjoy under federal law.
Once you file bankruptcy, all collection activity must stop. This includes foreclosures and repossessions, debt collectors and debt collection calls. Don’t wait until a judgment has been rendered against you or your wages garnished; by then, it might be too late. However, there are certain debts, like federally backed student loans, which cannot be discharged.
Once your bankruptcy case is discharged in court, your financial outlook and your credit score will improve drastically. Soon, you will be getting credit card offers, albeit with higher initial interest rates. You can qualify for a home mortgage through the Federal Housing Administration after just 24 months. Your credit slate will be wiped clean. Your payment history will begin anew. You won’t be burden by debts that would have haunted you and your credit report for years to come.
With a fresh start and a little discipline, you will quickly be seen as an acceptable credit risk. In fact, companies often prefer to loan to someone with a recent bankruptcy over someone saddled with a heavy load of debt because once a bankruptcy is discharged, you cannot file for bankruptcy again for eight years.
Meanwhile, those consumers still struggling with debt will be deemed an unacceptable risk because they could avail themselves of bankruptcy protection tomorrow. If you are considering filing bankruptcy, you should speak with an attorney at Matthews & Megna, LLC to discuss your options.