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Bankruptcy may actually improve your credit score

As the new year kicks into full swing, you may be hard at work on your list of resolutions. If improving your financial situation is one of your priorities, you may be weighing your options. While a bankruptcy filing is not right for every New Yorker, it is often an effective strategy for those swimming in an ocean of consumer debt. 

Even though a bankruptcy filing has many advantages, it also has some drawbacks. For example, those who file for bankruptcy protection often experience an immediate drop in their credit scores. Still, having too much debt can also cause your credit rating to tank. You should realize, though, that bankruptcy may actually be good for your credit score. 

Removing delinquent items 

One of the easiest ways to destroy your credit score is to make late payments. If you have delinquent accounts on your credit report, a bankruptcy filing may remove many of them. That is, if you discharge these debts in bankruptcy, they no longer appear as delinquent on your credit report. Instead, they read as discharged. 

Tweaking debt-to-credit ratio 

How reporting bureaus formulate credit scores is somewhat mysterious. Still, credit bureaus regularly consider an individual’s debt-to-income ratio. In general terms, the more debt you have relative to the amount you make, the lower your credit score likely is. Accordingly, if you remove some of your debt through bankruptcy without lowering your income, your creditworthiness may improve. 

Making a fresh start 

Debt has a way of crippling many consumers. If you cannot pay your bills, you may feel a sense of hopelessness. With a bankruptcy filing, though, you have the opportunity to begin anew. The fresh start may help you to keep your spending in check and focus on improving your credit score

While any bankruptcy filing is apt to take an initial toll on your creditworthiness, the news is not all bad. On the contrary, you may notice an eventual improvement to your credit score after taking advantage of bankruptcy protections.

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