Asian Journal- The Filipino-American Community Newspaper

PEOPLE who are considering bankruptcy are often faced with numerous concerns. But the one that tops the list is the worry that their credit will be so damaged that securing a loan in the future- especially a car or home loan- will be close to impossible. Are you one of these people? The information in this article may surprise you.

In many cases, the damage done to your credit by a bankruptcy filing is not as bad as you think especially if you have a long-term focus. So if you need to file bankruptcy to get out of debt and start over, don’t lose hope. Instead, get informed. Over the long run, obtaining a credit score high enough to get the type of loan that you need is achievable but you need to have a game plan. And it’s not as difficult as you may think.

Allow me to explain. From experience, I have seen that most people who are seriously struggling with debt aren’t exactly maintaining an outstanding credit rating to begin with. A lot of them already have late-payments, very high balances, charged-off accounts or collection accounts. Thus, some of these people may actually see a slight increase in their credit score after filing for bankruptcy. Why?

First of all, by filing for bankruptcy, your credit report is wiped clean. Your high balances, late payments and all records of unpaid debts are no longer reported as before. Instead, all accounts included in your bankruptcy filing are marked "included in Chapter 7 bankruptcy" or "included in Chapter 13 wage earner plan", depending on the type of bankruptcy you filed.

Secondly, you have to understand that when calculating your FICO credit scores, the formulas used to come up with your score are set up to grade your credit standing as compared with that of consumers in a similar financial position. According to Fair Isaac (the company that calculates what is know as your FICO credit score), here’s how it works: Consumers are divided into 10 groups, using what they call "score cards". The formula then ranks consumers in each group based on the others in the group. One of these score cards is "bankruptcy filers".

When you file for bankruptcy, your score is calculated based on how you do compared with other bankruptcy filers, NOT with people with perfect reports. This will explain why credit scores can vary widely among bankruptcy filers. In the "bankruptcy filers" group, you will find people with very good FICO scores, some who have very bad FICO scores, and some between (Unfortunately, no statistics are available on the average FICO score for bankruptcy filers). Although realistically speaking, you may not be able to bring up your score up to a perfect 850 as long as your bankruptcy remains on your credit report, with good credit management after filing, a score in the 700’s is still possible.

Lastly, keep in mind that 30% of your credit score is based on amounts owed. Although a bankruptcy on your credit is negative, the fact that you are getting rid of your debts improves your debt to income ratio, a factor not only considered in determining your credit score but also something that future lenders look at when reviewing your credit application.

Your credit score alone should not be the determining factor whether or not you should file for bankruptcy. You need to be realistic about your ability to get back on your feet. Of course, if you can find a way to get out of debt without declaring bankruptcy, by all means, do it. But if you are drowning in debt with no way out, bankruptcy can give you a much-needed fresh financial start. And by following a few credit rebuilding strategies after bankruptcy, your credit score can still be back in the 700’s within 2 to 3 years.