FICO Score v Bankruptcy
Ever heard that bankruptcy destroys your credit and kills your FICO score? Doesn’t bankruptcy destroy everyone’s credit? The short answer is no. I’m not claiming that bankruptcy always helps people’s credit. Of course that isn’t true–for example, if someone has a really high FICO score, like an 800, bankruptcy will lower their credit score. If a person has an 800 credit score, they are going to take a big hit by filing for bankruptcy. I’ll even guarantee it. How big of a hit? Probably around 150 points. But most people don’t have an 800 FICO score. Shortly before the real estate crash of 2008, FICO released a report that said 18.3% of consumers have an 800+ credit score. This isn’t true anymore. It’s around half that now, less than 10% of the public.
Most of our clients (or most of the people even considering bankruptcy in the first place) do not see a negative impact of bankruptcy on their credit. Bankruptcy clients tend not to have a FICO credit score over 700 in the first pace. In fact, less than 7% of bankruptcy clients have a FICO score above 700. For those people with a FICO score less than the 700 club, the impact on the FICO score is usually the reverse. In other words, bankruptcy helps improve their FICO credit score. Here’s why.
It boils down to this: bankruptcies aren’t the only “negative” reporting entry. There are many tradelines that actually lower your score. There are foreclosures. There are evictions. There are repossessions. Any one of the last three is nearly as bad as bankruptcy itself: the FICO score hit is extreme and immediate. Get a Repo on your report, kiss goodbye a 125 points on your FICO score. Got a few tradelines of accounts in collections? You are going to take a serious credit score hit.
When people finally muster the courage to file bankruptcy, they usually have a combination of repossession, foreclosures, evictions, their student loan accounts in default, and several accounts in collections. In short their credit is already shot. Bankruptcy isn’t going to hurt them here. Instead, it will help. It helps because the discharge acts as a “cleansing agent” removing the sting of the negative tradelines on the credit report. Put simply, bankruptcy fixes the ultimate problem: the debt to income ration. By going debt free, you eliminate one of the major elements dragging down your credit report. While the bankruptcy entry in itself isn’t good, it’s cleansing effect wipes away all of the other stuff that is bad, thereby increasing your FICO score.
Chances are if you are considering bankruptcy, bankruptcy will help improve your FICO score too. I can say that without even looking at your credit report. How can I do that? Because throughout our firm’s history, 93% of clients had a credit score increase 12 months after filing for bankruptcy. That’s an increase, not a decrease. Want to find out if your credit score is going to go up or down if you file? Call our office at 214-377-0166 to schedule an appointment.