Filing bankruptcy or settling debt impacts your credit. How your credit is impacted and for how long can change depending on your situation. Let’s take a look at some of the ways your credit is impacted by bankruptcy and debt solutions such as debt settlement.
Temporarily Lower Credit Score
In the case of debt settlement and in some cases debt consolidation, your credit score may be immediately lowered. If you settled debts that were in bad standing as well as debts in good standing the credit score impact may be larger. However, if you only settle debts in bad standing, the difference in your credit score may be quite small.
When filing bankruptcy, you may also see your credit score go down a bit. However, in some cases you can actually see a slight rise in your credit score as the months move along especially if you are current on any reaffirmed debts or took on new debts such as an auto loan. In that case, despite your bankruptcy, your new on-time payments are adding positive information to your credit report which is a net gain.
It’s important to note that in the case of bankruptcy and other debt solution, any negative impact on your credit score is short term. Your credit score will actually improve as time passes and as you add more positive information to your credit report.
Improved Debt-To-Income Ratio
If you file bankruptcy, you will immediately see an improved debt-to-income ratio because you’ve discharged a large number of unsecured debts. In some cases, debt settlement agreements may also improve your debt-to-income ratios as long you actually paid off a good number of your accounts as part of the settlement.
Both bankruptcy and some debt solutions such as debt settlement can offer long term benefits to your credit if used correctly.