If you have too much debt, you may struggle to pay monthly expenses, lose sleep and night and have problems securing financing. Taking control of your financial situation may involve exploring bankruptcy protection.
While a bankruptcy filing is likely to cause your personal credit score to drop initially, you may also notice an eventual improvement. Here are three ways bankruptcy may have a positive effect on your credit score.
1. Discharge delinquent debts
Having delinquent accounts on your credit report is a good way to earn a poor credit score. While it may not be possible to discharge all your delinquent debts, bankruptcy probably allows you to deal with many of them. Having fewer delinquent debts may result in an uptick in your credit score.
2. Improve your debt-to-income ratio
Credit reporting services, such as Equifax and Experian, consider many factors when calculating credit scores. An important one, though, is your debt-to income ratio. For a good credit score, this percentage, which compares how much you owe to how much you earn, should be lower than 20%.
Bankruptcy may improve your debt-to-income ratio by decreasing the amount of money you owe your creditors. If your income remains consistent or increases, your credit score may rise.
3. Rework your budget
If you are having difficulty paying your bills, you probably do not have funds to pay medical bills, credit card debt other outstanding balances. Because bankruptcy protection may discharge many of these debts, you may be able to rework your budget.
By making smart financial choices after filing for bankruptcy, you may have additional money to use on debts your bankruptcy does not discharge. Sooner or later, fewer debts from your reworked budget may cause an increase in your credit score.