To gauge risk, lenders in the Louisville area regularly consider the credit scores of potential borrowers. If you have one below 670, you may have a difficult time securing a mortgage, car loan or another type of financing.
Even though bankruptcy may be an effective way to put your financial affairs in order, it may cause an initial decline in your credit score. Eventually, though, your bankruptcy filing may lead to a considerable score improvement.
Your debt-to-income ratio
Credit bureaus are notoriously vague about the methods they use to calculate credit scores. Still, all consider how much income you have relative to your accumulated debt. If you use bankruptcy to discharge some debts while maintaining or increasing your existing income, your debt-to-income ratio is likely to improve.
If you miss payments, your accounts may become delinquent. Delinquent debts, of course, are the enemy of a good credit score. Fortunately, bankruptcy may convert your delinquent debts to discharged ones. Fewer delinquent accounts may cause your credit score to rise.
Better financial decisions
Some expenses, such as medical bills from a sudden illness, may be entirely out of your control. For others, you can likely exercise some restraint. If so, your bankruptcy filing may give you a clean financial slate. That is, after filing for bankruptcy, you may have motivation to make better financial decisions in the future.
Put simply, while you may have some concern about an immediate drop in your credit score after filing for bankruptcy, making smart financial choices is a good way to improve your personal credit rating.