I have not met anyone who ever considered filing bankruptcy that had not gotten to that point without first trying to think of any possible option other than filing.
That is for several reasons, but one of the main reasons most often stated is that they are worried about what filing a bankruptcy will do to their credit. They fear that they will never be able to obtain any credit again in the future; especially because that is what the credit grantors have told them in an effort to dissuade them from filing. That is simply not true and the truth will surprise you.
In order to understand why filing a bankruptcy is not as detrimental to your credit as you might think you must first understand how the credit rating system works. For a detailed discussion you can go to Understanding Your FICO Score. Here I will give a brief overview.
Bankruptcy and Credit and Your Score
The three main credit monitoring services are Experian, Equifax and TransUnion. Each of them maintains relatively the same type of information on you with some minor differences. However, you should periodically check all three for accuracy. You are entitled for a free copy of each credit report every year. To obtain your free credit report go to www.annualcreditreport.com
PO Box 1000
Chester, PA 19022-1000
PO Box 740241
Atlanta, GA 30374-0241
PO Box 2002
Allen, TX 75013-2002
Your FICO score is made up of various components, each weighted differently to determine how likely you are to repay a future loan on the agreed terms and conditions. The higher your score, the lower your interest rate, the more you can borrow and the more likely your loan will be approved. In recent years, as lenders reacted to the increase in defaults in credit card debt and mortgages you needed a higher score to obtain the same terms.
Once you start missing payments, these negative comments, known as “derogatories” are reported to the credit services and your FICO score is lowered. Each and every derogatory can stay on your credit history for seven years. Therefore, by the time someone is considering filing for bankruptcy chances are your credit score has already been severely compromised. While the filing of a bankruptcy will be an additional derogatory item on your report, lasting ten years, all or most of your unsecured debt will be eliminated. This in turn will make you a better credit risk than you were before you filed! Especially because you cannot file another bankruptcy for eight years.
As a result, after you receive your Discharge from the Bankruptcy Court, you will in all likelihood begin receiving offers for credit cards and you can then immediately begin to rebuild your credit score. Hopefully, with this fresh start you will be on your way to financial stability and security.