Does a Low Credit Score Require a Bankruptcy Filing?

The Relationship of a Low Credit Score and Bankruptcy

I was told my credit score was so low I should file for bankruptcy. What is this exactly?

Darcel

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Your credit score is a computer generated number that tries to condense your credit report and history into a simple number. Scores can run from 375 (or 500 depending on the source) to about 800. The lower the score, the higher the cost of credit.

Among the factors that go into your credit score are your repayment history, how much of your available credit you are using, how long you’ve had a relationship with the lender and how often you apply for new credit.

An excellent score is about 720 or above. A normal score is about 650.

While a low score will affect what you may pay for credit, it really has nothing to do with whether you should file for bankruptcy.

You are technically bankrupt when you liabilities exceed your assets.

Many small business people will have low scores because they are using all available credit to build their businesses. They might have cash flow problems, but they probably have substantial assets that can be used to pay off the debt if necessary. These assets are not included in the score.

In order to determine if you are personally bankrupt, you should determine how much money you have left over after taxes and necessary living expenses such as food, rent and utilities to use to pay off your bills. If there is a shortfall – for example if you owe $1000 a month to creditors, but only have $500 you can pay, bankruptcy should be an option.

However, before you can file bankruptcy, you must undergo credit counseling. Try to make the best of it and see if the counselor can help you work out a plan with your creditors. Or consider hiring a debt negotiation firm to try to lower your credit balances.

Due to the nature of the credit scoring system, you score might actually improve after a bankruptcy discharge and can be normal or close to it within about two years after the discharge.

However, there is no real correlation between your credit score and the need to file bankruptcy.

So worry more about your ratio of assets to liabilities and whether you have sufficient cash flow to pay your debts. Your credit score is only a number that is used when new credit is applied for – or when current lenders feel the urge to kick up your interest rates, but that’s another story (read Credit Cards for more on that subject).

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Okay, I have recently gone through a divorce and have monies in an escrow account waiting to be released.

When restitution is made to the creditors will this bring up the score?

How does one re-establish credit after divorce?

I know that joint the joint accounts have been paid, but it does not appear to have been updated on my credit report.

How do I make this happen?

Darcel

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These questions are totally different from the one you asked yesterday.

If you pay off your outstanding debts, continue to make your payments on time and are judicial in your use of credit, your credit score will rise.

Since credit scores give more weight to more current events, your actions from now on will raise your score, sometimes quite quickly.

If you have erroneous entries on your credit report, you can write to the credit bureaus and ask for corrections. The procedure – including what to do if problems arise - is explained more fully in Your Credit Report.

If you feel you need help repairing erroneous entries on the credit report, you can use a firm that specializes in credit repair, like Lexington Law.

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