Credit Scores and the Bankruptcy "Bump"
July 27th, 2010
Many people fear filing for bankruptcy because they're concerned it will hurt their credit rating. But often, after you file for bankruptcy, your credit score will actually improve. In the credit industry, it's known as the "bankruptcy bump."
Why does your credit score get better when you file for bankruptcy? It may seem strange, but the credit rating agencies can see a bankruptcy filing as a positive event for a consumer who has clearly gotten into financial trouble.
The agencies know that after your bankruptcy is concluded, your debts will be dramatically reduced. Since the amount of debt you have outstanding is a factor in determining your credit score, less debt can mean a better score.
You also cannot file for bankruptcy again anytime soon -- not for eight years for a Chapter 7 bankruptcy. In a weird way, that becomes a mark in your favor.
Credit agencies also like customers who make a lot of minimum payments on the charge balances, as consumers who end up in too much debt often do. Because they end up paying interest charges, banks like these customers. The worst customer for them is the kind who pays off their balance in full every month! Cash-strapped customers are also often big shoppers who tend to use their charge cards frequently -- again, the type of customer banks like.
In bankruptcy, your wages can't be garnished, so lenders also know your income won't suddenly disappear to pay another creditor. It may seem counterintuitive, but lenders know filing for bankruptcy can be a step on the road to financial recovery by an individual who's looking to resolve their financial problems and get a fresh start. That's why credit ratings tend to rise right after a bankruptcy filing.
Experienced Michigan Bankruptcy attorney Lander McLoyd can help you understand how your credit rating might be affected by a bankruptcy filing. If you have questions about filing for Bankruptcy in Michigan, contact Lander McLoyd for a free consultation. We're here to help!