Increase Your Credit Score by Filing for Bankruptcy

The title of this blog is unusual because most people associate filing for bankruptcy with failure. That couldn't be further from the truth.

In the United States we recognize that people sometimes need a restart button. The problems that lead to financial trouble can be from the loss of an important job, medical bills, a failed business, or even poor spending habits. The reason does not matter, what matters is there is a system designed to help.

So why would your credit score improve by filing for bankruptcy? It is actually a simple concept. No one knows the secret FICO formula but we do have some general guidelines.

The guidelines tell us that about 30% of the score is based on debt. The less debt you have, the better your score will be. Filing for bankruptcy generally eliminates all debt; that's a significant boost to a credit rating. You can also only file for Chapter 7 bankruptcy once every 8 years. Once you file, the credit card companies know they are safe for a while and are actually willing to extend you credit.

The guidelines tell us that about another 35% of the score is based on past performance, this includes bankruptcy filings, missed payments, and the general history of when payments were made. For most people considering bankruptcy, they have already missed many payments, their history of payments is already as bad as it can get.

Filing for bankruptcy will remove the negative history. The credit reporting agencies will deduct a certain amount for the bankruptcy, but since they can no longer access your past payment records, you have a chance to rewrite your history.

No one can predict what will happen to a credit score once a bankruptcy is filed. For example, if your credit score is 750 and you've been making all your payments, your credit score will obviously drop once you file for bankruptcy.

For most people though, their credit rating is so bad that a bankruptcy will improve it.