Bankruptcy Can Clear the Way to Better Credit – Here’s How

Don't let debt stop you

Image Source: Flickr User Nicholas Canup

Do you dream of owning a home but can’t get a mortgage because of your credit score? Have you been turned down for an auto loan? Is your credit score preventing you from getting the job you want or accomplishing your goals? If so, bankruptcy may be the answer to wiping your slate clean and improving your credit score sooner than you think.

How credit scores work

We all know that a good credit score is important, but some North Carolina consumers don’t understand how the score is calculated or how to improve their score. In a nutshell, having abundant credit available, using it sparingly, paying it off in full, and leaving the accounts open as long as you can is ideal. Your average age of credit is important, as is credit utilization.

Utilization means how much of your available credit you’re using. You should never use up more than 30% of your available credit. Not using your credit cards at all is advice you may read on some websites, but if you don’t use your credit cards, the card issuers may cancel them due to inactivity which can lower your credit score.

Also, if you don’t use your cards, your credit limits will never be raised. You don’t want your limits raised so you can rack up more debt, but to increase your total available credit which can then increase your credit score. The FICO score calculation is complex, but having lots of available credit, using it responsibly, paying off on time, and never maxing yourself out is key to keeping it high.

Starting out deep in debt is hard

If you are already deep in debt, it can be very hard to dig out and improve your score. If your credit cards are maxed out, it can take years to pay them down, and you’ll pay thousands in interest. If you’ve fallen behind on your mortgage as well, this makes things even more difficult. It can be like climbing out of a pit with no tools to help you on your way.

You have to pay your costs of living, and if your debt has grown out of control, it can leave little left over to chip away at your debt. That means you can be paying your bills on time, catching up gradually, and working hard, but still be stuck with a low credit score. That doesn’t seem fair, but it can work out that way.

And if you try and work out a payment plan with a creditor and they agree to take a lesser amount, they will usually close the account and anything paid less than the balance owed will lower your credit score more, plus it will usually lower your average age of accounts. On top of that, you can be required to pay taxes on any amounts that are forgiven by the creditor.

Bankruptcy may be a better way

Even if you want to pay off your debt in full, no matter how long it takes, this may not be the best approach to improve your credit score and get out of debt in a reasonable amount of time. Chapter 7 bankruptcy wipes out credit card debt, medical bills, some past-due taxes, and other unsecured debts. Your credit score will take an initial hit, but then you can rebuild.

If you keep on with deep debt, particularly if you have to pay bills late, and have maxed out cards, your credit score could be dropping every month. Filing Chapter 7 stops that decline, resets you, and allows you to begin rebuilding your score within months. Within 12 to 18 months after bankruptcy, you can get a car long. Within 18 to 24 months, you can get a mortgage.

You’ll have to be strategic in your actions to rebuild your credit after bankruptcy, but it can be done, and you can be much better off, faster than you think, by getting a clean slate with bankruptcy instead of wallowing in debt you can’t afford.

To find out more, contact the Law Offices of John T. Orcutt. Call +1-833-627-0115 now for a free North Carolina bankruptcy consultation in Raleigh, Durham, Fayetteville, Wilson, Greensboro or Wilmington.