Bankruptcy may eventually improve your credit score

There should be more to life than constantly struggling to pay monthly bills. Unfortunately, even if you manage to make payments on time, an emergency expense may leave you with a tremendous amount of debt. You probably do not have to bear the anxiety that comes with financial insecurity, though. On the contrary, filing for bankruptcy protection may help you to proactively manage your outstanding debts. 

Virtually everyone knows that bankruptcy filings are bad for credit scores. Experian, a credit reporting service, notes that bankruptcies remain on credit reports for a decade. While your filing may cause your creditworthiness to take an initial hit, bankruptcy may eventually improve your credit score in a couple important ways. 

Reclassifying delinquent accounts  

Your creditors expect you to make payments on time. If you do not have the financial ability to do so, some accounts may appear on your credit report as delinquent. Put simply, delinquent accounts are kryptonite for your credit score. A bankruptcy filing, though, reclassifies delinquent accounts as discharged. If you have a low credit score, this reclassification may cause an immediate improvement. 

Improving your debt-to-income ratio  

When extending credit, creditors typically consider borrowers’ debt-to-income ratio. That is, to ensure that you have the financial ability to pay your balances, your creditors want you to have considerably more income than debt. If you are drowning in debt, your debt-to-income ratio may be too high. Or, you may owe more in monthly payments than you make. A bankruptcy filing may allow you to discharge many of your debts. This can improve your debt-to-income ratio considerably, eventually causing your credit score to rise. 

If you have too much debt, your credit score may already be low. While a bankruptcy filing is apt to cause some problems with your credit rating, it may be the best way to manage your debt. Even better, taking advantage of bankruptcy protections may be the first step in rebuilding your creditworthiness.