How does filing bankruptcy help you rebuild your credit?

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This blog is for people who are thinking that they might have to file bankruptcy. I have been helping people work through their financial problems for so many years that I know the concerns that come up again and again. I want to provide practical information that you can use right now in helping decide how to take on these complicated issues.

How does filing bankruptcy help you rebuild your credit?

By Stephen Behrends, Mar 9 2017 06:24PM

We all know that filing bankruptcy will be a negative or adverse event on your credit report. So how can it help you rebuild your credit? Won't potential lenders avoid loaning money to someone who has filed bankruptcy?

The answer is that they look at one part of your credit report, your debt to income ratio, as part of their decision making process. And bankruptcy improves this aspect of your financial situation because the discharge that comes at the end of the bankruptcy case means that you do not have as much debt anymore or, maybe, not any debt at all.

One way of thinking about this is from the point of view of one of these potential new lenders. If they see that you do not have much debt, they will conclude that it will be easier for you to repay money loaned to you now. This is because you do not have many other debts that you are trying to pay.

Of course, the usual concerns will still apply. Any new lender will want to know if you have a source or repayment and whether there is anything, like a car, that can be security for the loan. But a bankruptcy discharge can be the first step towards rebuilding your credit just because it reduces the other debt that new lenders would think that you would still have to try to pay.

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