Making Sense Of Your Financial Mess

If you are at a place in life where you are considering bankruptcy, you have probably already heard how it will negatively impact your credit. What you may not have realized is that it can also have a positive impact as well. Not only will filing bankruptcy give you the ability to have a fresh start, but you may find that after filing you may have a better FICO score, which in turn will give you access to more credit than you had before.

Understanding Your FICO Score

Most people understand the importance of their FICO score. They understand that this very important numerical calculation often determines how much credit you are extended, as well at what rate. A score can range from 300 which is considered to be poor, to 900 which is considered to be excellent.

Unfortunately, no one knows the exact data that goes into calculating their score.  What is known is a general outline of what information is used, as well as how it is weighted. It is estimated that your FICO score is broken down as follows:

Your payment history makes up approximately 35% of your score. The better your payment record is, the higher this portion of your score is. If you have judgments, liens, or even bankruptcies, these will have a negative effect in this area.

How much you owe makes up the next 30% of your score. This includes how much you owe, the number of accounts you owe on, and how much you owe in comparison to your credit lines. Another 15% of your score is made up of the length of time you have had credit. The longer you are able to successfully manage your credit the higher this area will be. 

Another 10% is composed of the type of credit you have. It is better to have a mixture of credit types. These may include your mortgage, car loans, as well as store accounts. The last 10% looks at the amount of new credit you have applied for. A lot of new accounts in a short period of time may have a negative impact on your score.

Filing Bankruptcy Allows You To Clean Up Your Credit Report

Bad things really do happen to good people. Unfortunately, many of these things can have a direct impact on your financial health and are often common causes that people have to file for bankruptcy. The top five reasons for filing are:

• The loss of employment
• Large medical bills
• Prevent repossessions
• Prevent foreclosures
• Eliminate or clear debt

In most, if not all of these situations, most people find themselves with late payments, delinquent accounts, and high credit balances. All of these will contribute to lowering your credit score. By filing bankruptcy, you will be able to have these delinquencies removed off of your credit record. Although the delinquency may still show up as being discharged during the bankruptcy, this could actually improve your credit score. 

Bankruptcy Allows You To Cut Your Losses

When you fall behind on your payments, you often find it hard to catch up. This often results in you falling further behind, or ending up in collections. If you continue to try to manage these accounts these delinquencies continue to grow. Filing bankruptcy will allow you to start over with a clean record. This allows you to not only get your finances under control, but once you start using credit again, it will give these positive entries the ability to have more impact on your score by reducing your debt-to-credit ratio.

Bankruptcy Is Just The First Step In Improving Your Credit

Once you have taken the necessary steps to file bankruptcy, there are some other things you will need to do to position yourself for good credit in the future. A few of these are:

Take care of any financial obligations you may have. There are some debts such as student loans and child support which cannot be discharged in bankruptcy. There are other obligations such as mortgages that you may choose to not include. Once you file bankruptcy, make sure you pay these obligations on time. 

Ensure your credit report is correct. One of the easiest and least expensive ways to boost your credit score is to remove any inaccurate entries your report may have. You need to request a copy of your credit report annually. You can request these through Equifax, and TransUnion Canada; you will want to request a copy from both locations, due to some agencies reporting to one and not the other. Once you request a copy, review it to ensure it is correct. 

Apply for new credit slowly and cautiously. Once you file for bankruptcy, your mailbox will fill up with offers from companies offering to send you a credit card. Explore these offers with caution. Many contain hidden fees and high interest rates. If you choose the wrong one, you could end up having difficulties paying off your balances. Consider applying for a secured, or semi-secured card through your personal bank or credit union. They may also be willing to give you a fresh start.