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How Filing a Chapter 7 Bankruptcy Can Help Your Credit in the Long Run

Although the thought of filing for bankruptcy is scary, there is a light at the end of the tunnel as your credit score can be rebuilt after filing a bankruptcy. While bankruptcy impacts your credit score, its effects vary. For starters, filing stops aggressive debt collectors from hounding you to pay up, and this provides some stress relief. Bankruptcy also discharges those debts that you can't afford to pay, but it doesn't leave lifelong damage to your finances. While filing for bankruptcy stays on your credit report for seven to ten years, this doesn't necessarily impact your ability to obtain credit during that time. In fact, filing for bankruptcy can put you on a path to a fresh start and the ability to repair your credit score. 

How Bankruptcy Affects Your Credit Score

When you file for bankruptcy, your credit score dips and this makes it hard to borrow. Getting a personal bank loan, a mortgage, or a credit card becomes difficult in the short-term once you file for bankruptcy.  Ironically, however, getting a car loan is generally easier after filing for bankruptcy. Since you likely already have a low credit score by the time you decide to file for bankruptcy, the decision can actually help increase your credit score in the long run. Filing for bankruptcy stops the negative reporting for the discharged debt on your credit report. Additionally, it is common that some creditors remove themselves altogether from your credit report.

Will Bankruptcy Ruin Your Good Credit Score?

Many creditors don't like to see bankruptcy on your credit report. However, the damage it does to your credit score depends on how good your credit was before you declared bankruptcy. If your debt-to-asset ratio is high (your debts are more than your assets), then your credit rating may appear bad. Once you file for bankruptcy, your credit score dips but doesn't necessarily plummet. If your credit rating was good before declaring bankruptcy, your credit score takes a bigger dip post-filing. Once your case is concluded, it is essential to take steps to rebuild your credit score.

How Bankruptcy Can Help Your Credit Score in the Long Run

When you file for bankruptcy, the majority of your delinquent debts are discharged in approximately three months. However, filing for bankruptcy will not provide immediate credit score improvement, but it can be the quickest way to get a better credit rating.

By stopping negative reporting, debtors can start to rebuild their credit score. Getting rid of delinquent account reports characterized by high credit balances and late payments which were contained in your credit report can help start building your credit score upwards, since a bankruptcy discharge will wipe these debts clean. The bankruptcy discharged debts can no longer be reported as delinquent. Instead, they will be reported as discharged since they are included in your bankruptcy. 

Similarly, improving your debt-to-credit ratio leads to a better credit score. The amounts of money you are in debt make up about 30% of your credit score. Bankruptcy can help your debt-to-credit ratio, since the lower your debt is compared to your available credit, the higher your potential credit score. If your credit accounts have high credit limits, they are frozen or closed in the event you file for bankruptcy and their balances may be discharged. You can boost your credit score when you have no outstanding debts compared to available credit limits, resulting in a favorable debt-to-credit ratio.

We Can Help

Filing for bankruptcy in the St. Louis metropolitan area gives you a fresh start by providing you with a way to improve your credit score. Contact a St. Louis Bankruptcy Attorney today to find out how bankruptcy can help.