If you are struggling to pay your monthly bills, you may also have difficulty obtaining a personal line of credit or credit card. After all, if your debt-to-income ratio is too high, you may have a low credit score. Filing for bankruptcy is likely to drive your credit score further downward.
You may not realize, though, your bankruptcy filing may cause your personal credit rating to improve over time.
Delinquent debts are simply debts you have failed to pay for 30, 60, 90 or 120 days. The more missed payments you have, the lower your credit score is apt to be. In fact, Credit Karma says delinquent debts can drop your credit score by as much as 125 points.
Taking advantage of bankruptcy protection may allow you to discharge many of your delinquent debts. While these debts may appear as discharged on your credit report, they are no longer delinquent. This distinction may eventually cause your credit score to rise.
Your debt-to-income ratio
Even though credit reporting bureaus use a complex formula to calculate your credit score, your debt-to-income ratio is a major factor in it. If you have discharged debts in bankruptcy, your debt-to-income ratio automatically improves. In the long run, having fewer debts relative to your income may benefit your credit score.
It can be virtually impossible to plan for future financial success when you have excessive debt. Because you may no longer have to pay certain debts after bankruptcy, you have the opportunity to create a workable budget. If you stick to the budget, you may see a vast improvement in your personal creditworthiness.
You may not want to let an initial drop in your credit score dissuade you from exploring your bankruptcy options. Ultimately, by taking control of your debt, you may put both yourself and your credit score on the path to a brighter financial future.