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Bankruptcy Myth Dispelled – Filing can actually improve your credit score.

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Every one of my clients enters my office in a state of confusion, anxiety, and financial distress.  Although typically their number one goal is to alleviate those conditions, they quickly realize that they have to live life after filing a bankruptcy proceeding and are concerned about the conditions under which they must do so. A legitimate concern for most people is what life after bankruptcy looks like, and just how far their credit score will drop once they file.

Imagine a client’s surprise and delight when I tell them that in most cases your credit score will rise within a year of completion of your bankruptcy filing. Although that seems counterintuitive and runs in direct contrast to what most people hear on the street, years of experience and thousands of cases filed, have shown me otherwise. How can this be?  What magic do I possess to make this happen?

First of all, it is important to note that when people are pushed to the point of bankruptcy they usually have been trying, and struggling, for years to pay their bills. Bad things happen to good people seems to be a tired expression, but I have found it to be very true. Job loss, health care costs, unexpected expenses, and school tuitions all have contributed to kind, hardworking people having to file bankruptcy. Scores are usually very low by the time a client gets to my office, and there is nowhere to go but up.

Secondary to that, the term “debt to income ratio” is one that most people recognize.  Think about it and use your hands to illustrate my point. Your debt is overwhelming. You are just about drowning in it. Put one hand up around your forehead where the river of bills is about to put you under to represent your debt. Your income is steady. Put the other hand right around your midsection to represent your income. Now consider your debt being erased by a bankruptcy filing. For each debt that will be erased, lower the hand near your forehead a few inches. Eventually, your debt will be below your income, thereby flipping the script on your debt to income ratio. Creditors moving forward will analyze your new debt to income ratio, and future credit will be available. Your scores will improve, and life will be better.


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