HOW WILL BANKRUPTCY AFFECT MY CREDIT?

Many people fear that, because a bankruptcy is referenced on their credit reports, the bankruptcy has a negative impact on one's ability to borrow. Obviously, a bankruptcy is not a positive mark on one's credit, but you have to consider your whole credit picture. By the time somebody files a bankruptcy, his or her credit report usually looks pretty bleak. The bankruptcy cleans up past problems and allows you to start building your credit again.

If you have income, it is often possible to get credit cards and car loans shortly after your discharge. It is even possible to get a home mortgage after as little as two years following a discharge. Many of these same people would not have been able to obtain this credit without getting rid of their old debt by filing for bankruptcy.

An Article from Smartmoney.com discusses the advantages to credit upon filing for bankruptcy:

"Part of the reason why your score isn't likely to suffer all that much is that most folks seriously struggling with debt aren't exactly maintaining a top-notch score to begin with. "In virtually every instance, the consumer will already have repayment problems such as late payments, very high balances, charged-off accounts or collection accounts," says Rod Griffin, a spokesman for Experian, one of the three major credit bureaus. For details on what goes into a credit score, click here.

In light of this, some consumers may even see a slight boost in their credit scores after filing bankruptcy, according to John Ulzheimer, president of Credit.com Educational Services, a consumer credit education group. Why? To start with, your credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy you filed. Both types of bankruptcy affect your credit score in the same way, according to Ulzheimer. Granted, you aren't likely to see a big jump — but if you've just been scraping by, your score isn't likely to fall much further. That said, a bankruptcy could help your score over the long term, as well. Here's why: When calculating scores, the formulas developed by Fair Isaac (the company that calculates the most widely used credit score, known as the FICO score) are set up to grade someone's credit standing as compared with that of consumers in a similar financial position. To do that, Fair Isaac divides consumers into 10 groups, using what it calls "score cards." It then ranks the consumers in each group based on the others in the group. One of these score cards is bankruptcy filers. (For competitive reasons, Fair Isaac doesn't release what constitutes all 10 groups.) In other words, when you file bankruptcy your score is determined based on how you do compared with other bankruptcy filers, explains Fair Isaac spokesman Craig Watts. The reason? Fair Isaac has found this to predict credit risk better. "It's a much fairer comparison," he says. "You're not compared with people with rosy, perfect reports.""