Countless times I have spoken to new clients who are misinformed, sometimes by inexperienced lawyers, about how a Chapter 7 or Chapter 13 filing will impact their FICO score. They are often under the mistaken belief that their credit score will necessarily suffer and go down. In many cases, this simply is not true. Others mistakenly believe that if you file bankruptcy your FICO score will remain in the 400-500 range for the next 5 years. This is not the case. In fact, for most of my clients, bankruptcy will actually increase a credit score.
Bankruptcy Can Increase Your FICO Credit Score
The effect that bankruptcy has on your credit score depends a lot on where your score is to begin with, that is, what your FICO score is before you file bankruptcy. If you have a FICO score in the 400-500 range before you file your case, then your filing can really help to clear up your credit report and increase your credit rating. In such a case, assuming you practice good credit habits after you file, you may find that within a year or two after your case is filed your FICO score is in the 500-600 range, or higher.
If you have late payments on your credit report and your score is already really low, bankruptcy may be a good option for increasing your rating. If you didn’t file and were stuck with all of your debt and delinquent accounts, you’ll keep receiving late payment reports and your credit rating will never increase. Filing bankruptcy, in contrast, gives you a fresh start and a chance to really improve your credit and lift up your rating.
In fact, many of my clients who have scores in the 500 range have substantially increased scores, in the law 600s, just 1-2 years after their case is filed and they receive a discharge. Their credit rating after bankruptcy is significantly higher then what it was before their case was filed and their credit report was full of 30, 60 and 90 day late reports.
If you currently have an excellent credit score in the 700 to 800 range, your credit rating one year after you file will likely be lower, and it may take you 5 years to get your score back up to the range of where it was.
No matter what your current score may be, the key thing to understand is that after you receive a discharge of your debts you absolutely can begin to rebuild and raise your score. You just have to start practicing responsible spending habits and making sure that you pay all of your monthly payments on time. That way, your Chapter 13 of Chapter 7 filing serves as your fresh start and then you will have maintained perfect credit after your filing, helping you to rebuild credit and causing your FICO score to keep going up.
To give you something concrete to wrap your hands around, your lawyer can pull a credit report before you file your case that shows both your current credit rating and also what your projected after bankruptcy FICO score would be one year or so after filing. Armed with your projected after bankruptcy credit score, you can confidently file your case and obtain needed debt relief, knowing that ultimately the whole process will resulting in lifting your rating.
