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Why does a credit score go up after bankruptcy rather than go down?


Most people that call us say this makes no sense to them and that credit score worries are the main reason they put off looking into filing bankruptcy. They have heard bad advice from TV ads, misinformed individuals and even the internet.


This is how it works: because your credit score is based on your debt versus your income, once you unload your debt, your score will naturally go up. Many banks don’t care whether you paid your debts or wiped them out in a bankruptcy. Lenders usually only care that your debts are either gone or at a manageable level.


Banks look at the bottom line. When you are approaching a bank for a future loan, their bottom line question is “Can this applicant afford to pay their loan”? Is there enough income? Is their debt level low enough to make this loan a good risk?


Yes, the bankruptcy will show up on your credit report for 7 to 10 years, but that is a good thing. Your credit report is a credit history, not a report card like high school. By law, your debts must remain on your credit report for 7 to 10 years. Once you file for bankruptcy and receive your discharge, the words “discharged in bankruptcy” [or something similar] will remain below or next to each debt showing on your credit report. These words to a bank mean your debts are gone. In a good way, you are now a juicy pork chop sitting in front of that hungry lender. Following a bankruptcy discharge, banks know you are at a lower risk to default since you are not writing checks each month to your credit card bills…the ones that were previously chasing you around your home each month. Bills that caused you to lose sleep and worry needlessly.



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