Bankruptcy & Your Credit Score: What You Need To Know
What Is A Credit Score?
A credit score is a numerical representation of a person’s creditworthiness. It is calculated using information from credit reports, such as payment history, length of credit history, credit utilization, types of credit used, and recent credit inquiries.
The credit score ranges from 300 to 850, with higher scores indicating lower credit risk. A score of 700 or above is generally considered good, while a score of 800 or above is excellent.
Lenders, landlords, and other creditors use credit scores to assess the risk of lending money or extending credit to an individual.
A higher credit score means the person is less likely to default on a loan or credit obligation, making them a more attractive borrower.
It’s important to note that there are different credit scoring models used by different credit bureaus and lenders.
While the basic factors considered in calculating credit scores are similar, the weight given to each factor may differ, resulting in variations in the final score.
Why Do I Need A Credit Score?
A credit score is essential because it affects our ability to access credit, loans, and other financial services.
Lenders, banks, and credit card companies rely on credit scores to assess the risk of lending money or extending credit to individuals.
A high credit score can make it easier to qualify for loans and credit cards, and also result in lower interest rates and better loan terms.
On the other hand, a low credit score can make it difficult to access credit or result in higher interest rates and unfavorable loan terms.
Credit scores are also being used by landlords and employers to assess the financial responsibility of potential tenants and employees.
A good credit score can improve your chances of securing a rental property or a job that requires handling finances.
Pros & Cons Of Credit Scores
The main advantage of credit scores is that they provide lenders with a quick and easy way to assess an individual’s creditworthiness.
This helps lenders make informed decisions about lending money, which can ultimately benefit both the lender and the borrower.
A good credit score can result in lower interest rates, better loan terms, and easier access to credit and loans.
However, there are also some downsides to credit scores. The scoring models used by credit bureaus and lenders are complex, and the exact formula used to calculate credit scores is not publicly disclosed.
This lack of transparency can make it difficult for individuals to understand how their credit score is being calculated or how to improve it.
Moreover, credit scores are not always a reliable indicator of an individual’s financial health or creditworthiness.
Factors outside of an individual’s control, such as a pandemic or a sudden job loss, can negatively impact their credit score.
Additionally, credit reports can contain errors or inaccurate information that can hurt an individual’s credit score.
Who Benefits From A Credit Score?
Lenders are the primary beneficiaries of credit scores. Credit scores provide lenders with a way to quickly assess an individual’s creditworthiness and risk of defaulting on a loan or credit card.
By using credit scores, lenders can make informed decisions about lending money, setting interest rates, and determining loan terms.
A good credit score can benefit borrowers as well by making it easier to qualify for loans and credit cards with lower interest rates and better terms. Additionally, having a good credit score can also improve an individual’s chances of being approved for rental applications or securing employment in certain industries.
It’s important to note that credit scores can also be used against individuals. A low credit score can result in higher interest rates, difficulty accessing credit or loans, and even impact employment opportunities or housing applications.
Overall, while credit scores primarily benefit lenders, maintaining a good credit score can also provide financial benefits for individuals.
What Is An Average Credit Score?
The average credit score can vary depending on the source, but generally, a score between 670 to 739 is considered a “good” credit score, while a score below 580 is considered “poor”.
However, when people reach out for a bankruptcy consultation, their credit score is usually already relatively low, often due to missed payments and judgments on their credit report.
Proactive individuals who have always paid their bills on time may have higher credit scores, but those who have been consistently late on payments usually have lower scores.
For those who are concerned about how bankruptcy will impact their credit score, it’s important to assess their current score and consider the benefits of rebuilding credit faster after filing for bankruptcy.
What Happens After Someone Files For Bankruptcy?
Filing for bankruptcy can have a significant impact on an individual’s credit score. A bankruptcy filing will appear on a credit report and can stay on the report for up to ten years.
As a result, the individual’s credit score will likely dip initially. However, there are some circumstances in which a bankruptcy filing can improve a person’s credit score.
For example, if the person’s creditors report a zero balance to credit reporting agencies after the bankruptcy filing, the individual’s debt-to-income ratio may improve significantly, which could result in a higher credit score. While this is not a typical outcome, it is possible.
Ultimately, the impact of a bankruptcy filing on a person’s credit score will depend on many factors, including the individual’s credit history, the type of bankruptcy filed, and how well the individual manages their finances after the bankruptcy discharge.
Can The Time Of Bankruptcy Affect Your Credit Score?
The type of bankruptcy filed can affect a person’s credit score differently. A Chapter 13 bankruptcy tends to have a less severe impact on credit scores than a Chapter 7 bankruptcy.
This is because Chapter 13 involves a monthly payment plan that allows creditors to receive some payment, which is less detrimental to them compared to a Chapter 7 filing where assets may be liquidated to pay off debts.
Additionally, the impact of a Chapter 13 bankruptcy on credit reports may last longer than a Chapter 7. The balance may stay on the credit report for a while and won’t show as discharged until the actual discharge happens three to five years after filing.
While a Chapter 7 bankruptcy can be a significant hit to a credit score, it typically resolves more quickly, allowing individuals to start rebuilding their credit score sooner.
Nonetheless, both Chapter 7 and Chapter 13 bankruptcies will have some negative impact on a person’s credit score, and the exact impact will depend on several factors unique to each case.
Credit Scores During Bankruptcy
During a bankruptcy proceeding, the court does not look at a person’s credit score, and the credit score has no impact on the actual bankruptcy process itself. The courts are concerned about the individual’s debts, the type of debt, how it will be treated, the individual’s income, regular expenses, household goods, and assets.
The court will review the individual’s financial situation and determine how best to address the outstanding debts.
The credit score or FICO score of the individual is not relevant to the bankruptcy proceedings and will not come up in court.
Therefore, individuals who file for bankruptcy should not worry about their credit score as it does not play a role in the process.
Does Having A Good Or Bad Credit Score Matter?
When it comes to filing for bankruptcy, having a good or bad credit score does not matter at all. The court does not consider credit scores when determining the bankruptcy process or which chapter of bankruptcy to file.
Understanding what’s on your credit report is important, as it will make a difference in the bankruptcy proceedings.
It is recommended that individuals pull their credit report at least once a year to review it for errors or any reported poorly.
Checking for errors in the credit report can help prevent any negative impact on the credit score.
Therefore, while credit scores are not relevant to bankruptcy filings, understanding what is on the credit report can help manage one’s credit score.
Does Bankruptcy Affect Hiring Decisions?
Bankruptcy is unlikely to affect most hiring decisions. Although a bankruptcy filing may appear on a background check, it usually only matters in high-security financial jobs.
Credit reports or scores generally do not play a role in the hiring process. Even if a job candidate has outstanding debts, they may still be hired if they can demonstrate that they have made arrangements to pay off the debt.
Amy, our experienced Bankruptcy Attorney, has never seen a case where an individual was denied a promotion or security clearance solely because they filed for bankruptcy, except for high-security clearances or financial sector jobs.
Anyhow, individuals need not worry about the impact of bankruptcy on their hiring prospects, except in specific circumstances.
How Much Debt Can Impact Credit Score?
The impact of debt on credit score is not determined by a specific number, but rather by a combination of factors such as debt-to-income ratio, timely payments, and the type of debt incurred.
Consumer debt, such as payday loans and credit card debt, tends to have a greater impact due to higher interest rates and fees.
This makes it more difficult to pay off and potentially leads to missed or late payments, resulting in a negative impact on credit scores.
Having low or no debt does not necessarily guarantee a good credit score.
Credit history, length of credit, and other factors also play a significant role in determining a credit score.
To maintain a good credit score, it’s important to make timely payments and avoid taking on excessive debt.
Seeking professional financial advice is recommended for those struggling with debt to create a plan for managing and paying off their debt.
By taking these steps, individuals can improve their credit scores and financial well-being over time.
Are Credit Scores Fair?
Credit scoring has been criticized for potential biases against people living in certain areas of a city, which can have negative effects on their credit scores.
The fairness of this system has been called into question, as credit scoring was originally introduced in the 1950s to reduce the scores of wealthy individuals.
Although the system was temporarily stopped for 30 years, it was reintroduced in the 1980s with changes that favored banks.
This system can impose additional costs on individuals with low income, as they may face higher interest rates despite making timely payments.
It can be challenging for people who are below the poverty level to catch up on bills and other expenses.
As a result, there are concerns that credit scoring may not be an accurate reflection of an individual’s creditworthiness.
Despite these concerns, credit scoring is the current system in place, and people must comply with it.
How To Rebuild Credit After Bankruptcy?
After someone has gone through bankruptcy, it’s important to focus on rebuilding credit. There are many resources available online, including the Federal Trade Commission’s publication on raising credit scores.
One helpful tip is to get one credit card and use it only for things that you’re already spending money on, such as gas.
Make sure to pay it off every month or keep a deficient balance that you can pay off within a few months. This will help you rebuild your credit quickly.
It’s important to be cautious with your new buying power and use credit responsibly to avoid falling into debt again.
If you have additional questions about your credit score, your bankruptcy case, or your specific case, you can contact us at (855) 502-0555. After a brief 10-minute evaluation of your case over the phone, we will let you know what options you have. You can also follow us on our social networks so you don’t miss our weekly broadcasts on Facebook, YouTube, and Twitch.
Frequently Asked Questions About Credit Score In Bankruptcy
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“In what was probably the most difficult point of my life Lincoln-Goldfinch was able to guide me through the tough decision of getting out of debt through a chapter 7 bankruptcy. After considering all options of debt management/consolidation/ settlement and reaching out to numerous lawyers and agencies Lincoln-Goldfinch spent the most time with my initial consultation and made me feel like I was really listened to and not just a statistic. Amy Wilburn was wonderful every step of the way in being available to answers all my questions and put my mind at ease. My case was dismissed successfully and I am now living such a better quality of life after learning a stern lesson in life of fiscal responsibility. I recommend the team at Lincoln-Goldfinch 100% if you find your self in need of quality representation.”