If you are drowning in a sea of medical bills, credit card balances or other debt, you are not alone. In fact, the average American has nearly $40,000 in outstanding debt, not including mortgages. Even though bankruptcy may offer the clearest path to financial freedom, you may worry about its short-term effect on your credit rating.
While there are many ways to rebuild credit after a bankruptcy filing, simply declaring bankruptcy may eventually improve your credit score in one or more of the following ways.
1. Boost your debt-to-income ratio
Very few people understand precisely how credit rating bureaus calculate credit scores. After all, these services use proprietary formulas to determine an individual’s creditworthiness. Nevertheless, a person’s debt-to-income ratio usually plays a critical role in his or her credit score.
Your debt-to-income ratio compares how much you have borrowed to how much your eligible to borrow. When you declare bankruptcy, you discharge many of your debts. If you then have a credit line you have not used, you may have a better debt-to-income ratio. This may result in an immediate uptick in your credit rating.
2. Remove delinquent matters
Delinquent accounts, such as those you have paid late or not paid at all, appear on your credit report. These accounts can wreak havoc on your creditworthiness. When you declare bankruptcy, though, many of these accounts may move from delinquent to discharged. If you have a low credit score, removing the delinquent accounts may raise it a few points.
3. Focus on financial solvency
Having bills you cannot pay can take a toll on your emotional well-being. If you have given up on financial solvency, filing for bankruptcy protection may give you a fresh start. You can use this start to build a solid financial foundation. Eventually, this focus is apt to result in a better credit score.
Life is about more than the constant struggle to pay outstanding debts. While bankruptcy protection is not right for everyone, putting your financial affairs in order may be the first step in improving your creditworthiness.