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Bankruptcy Can Improve Your Credit

August 29, 2012

When a person files bankruptcy, the federal Fair Credit Reporting Act (FCRA) directs consumer credit reporting agencies to reclassify consumer debts as "included in bankruptcy." No credit reporting activity is allowed after the date of the bankruptcy filing. That includes late payment reports or transfers to a debt collection company.

Since debts are effectively "frozen" on the date the bankruptcy is filed, your credit can start to heal immediately after filing. Credit scores are heavily weighted to place more importance on recent credit activity. Since negative entries are not allowed after bankruptcy, your credit score will quickly improve over time.

Once a debt is discharged, the FCRA directs that the debt is to be listed as "discharged in bankruptcy." The bankruptcy discharge is the hallmark of a Chapter 7 case. The discharge is a federal court injunction prohibiting creditors from collecting on financial obligations owed by the debtor. The bankruptcy discharge eliminates the debtor’s legal obligation to pay the debt.

Once the debt is discharged and is no longer a personal financial obligation, your credit score will again improve. Credit scoring models place great emphasis on outstanding debt balances and consider the percentage of credit used, the overall debt load, and your debt-to-income ratio. Without this oppressive debt hanging over your head, you are better able to pay your bills. You are, therefore, more credit worthy.

Filing a bankruptcy case is a very serious matter – one that has serious consequences. However, for those that need it, bankruptcy is welcome relief. In many cases debtors see immediate improvement in their credit scores, and many debtors are able to obtain a car loan after bankruptcy or a house loan one to two years after their discharge. If you need this type of relief, contact an experienced bankruptcy attorney.


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