Bankruptcy the First Step in Rebuilding Credit

When people reach the point of contacting a bankruptcy attorney, often their circumstances include not only overwhelming debt, but low credit scores from multiple defaults and late payments. The bankruptcy will not only address the debt issue, but by eliminating the debt, begin the process of building your credit score.

Bankruptcy typically causes a credit score loss of more than 200 points although many times it will be even less if your score has been impacted because of bad credit. You can minimize the impact and hasten the recovery of your credit through better awareness of how credit scores treat bankruptcy. The presence of bankruptcy information on the credit report and the length of time since the information first appeared, are the strongest determining factors.

Only the public record of a Chapter 7 bankruptcy lasts for 10 years. All other bankruptcy references on a credit report remain for 7 years, such as: trade lines indicating "account included in bankruptcy," third-party collection debts, judgements and tax liens discharged through bankruptcy and Chapter 13 public record items.

If you manage your credit optimally in its aftermath you can be looking at a 700 score or higher after only about 4-5 years. Such a speedy score recovery requires a few things including: 1.) Adding "positive" credit, such as secured credit cards and installment loans, to help offset the negatives on the credit report, 2.) On-time payments on all remaining and recently acquired debt and 3.) Low balances on credit cards that make up less than 25 percent of the credit limits.

Certain credit scoring factors evaluate the magnitude of the bankruptcy, such as the amount of debt discharged and the proportion of negative to positive accounts on the credit report.

Credit history associated with accounts included in bankruptcy will not be removed from your credit report. All of the bankruptcy-related history continues to appear on your credit report and is considered by the scoring formulas for the entire 7 to 10 post-bankruptcy years, though the negative impact diminishes over time. Ignoring the debt will continue the low credit score. With an ability to rebuild credit after bankruptcy, it should be considered an option to not only address the debt but improve your credit score.

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