This time of year many of my clients are considering bankruptcy. They have held off as long as possible and now that the holidays are over, they know they need some debt relief. The most frequent question asked is: How badly will bankruptcy affect my credit score?
Even after 23 years of practicing law, I have a hard time answering that question. Folks want quantitative answers. But even though they seem based on a logical arithmetic equation, credit scores are funny things. The calculation is a mystery, as is some of the logic behind it. The formula is a secret of the companies who generate the scores!
Credit scores are fluid
We do know that if we pay our bills on time, our score will be good. If we do not, it will be bad. Credit scores are fluid. They go up and down constantly, and some of the triggering events aren’t even reflective of our credit worthiness. For example, have you ever looked at your credit score after applying for and receiving a new credit card at the check-out lane (so you can get that 10% discount?) You got the new card because your credit is good. But, getting the new card causes your score to drop! Ever been told by a mortgage broker that you have too many recent credit inquiries on your report? Well, of course you do! You have been shopping around for the best mortgage rates!
So, should you care that your credit score will be affected by a bankruptcy? My answer is no. Credit scores, in and of themselves, are meaningless. Your score does impact your ability to get credit and that which the credit buys you (the new home, new car, new clothes, etc.), but really, folks, do you want more credit right now? Actually, bankruptcy might even help your score – in the long run. Let me explain.
If you can’t pay your bills on time, your credit score will continue to decline and the decline will continue as long as you struggle (and fail) to pay all your debts. On the other hand, if you file bankruptcy, your credit score will be impacted initially, but once your bankruptcy case is closed and you begin to reestablish good payment history, your score will start to improve faster than if you continue struggling (and failing) to pay the bills you cannot now afford.
If you are in the central Florida area near and around Orlando or in The Villages and would like to schedule a consultation with me, feel free to call Toll free at 1-877-447-4667.