A common question I get as a bankruptcy attorney is, “how does filing for bankruptcy affect my credit score?”  Unfortunately, as is common with the law, the answer is, “it depends.”

The first consideration is where your credit stands before filing bankruptcy.  If your credit score is 800 and you have never missed a payment, then your credit score will likely drop significantly as you plan for and file bankruptcy.  One of the big reasons for this drop is that you will likely stop paying your creditors prior to filing for bankruptcy.  When this happens, the creditors will report your account as delinquent and your credit score will drop.

On the other hand, if you are already missing payments and your creditors are reporting your accounts as delinquent, the filing of bankruptcy will stop this negative reporting and, upon the conclusion of your bankruptcy, your credit will begin to improve as time passes.

Another big consideration is your debt-to-income ratio.  Before your credit score really comes into play, your credits will look at your debt-to-income ratio. If your debt to income ratio is too high, creditors are unlikely to lend to you, no matter your credit score.  Upon receiving your bankruptcy discharge, your debt-to-income ratio instantly improves.

After bankruptcy, your credit score will improve with time.  How quickly your score improves depends on a number of factors including your credit history and your post-bankruptcy actions (e.g., obtaining new credit, making payments on time).

Many people have misconceptions regarding the impact of bankruptcy on their credit and, many times, their fears are unfounded.  If you’re considering bankruptcy in Colorado and are worried about how it will affect your credit score, give us a call and you can discuss your specific situation with a knowledgeable bankruptcy attorney.