DeclaringBankruptcy CanImprove YourCredit ScoreBy Aleksandra TodorovaSmart Money | January 22, 2007

THE DECISION OF whether to file for bankruptcy protectionis not an easy one. Among the numerous concerns, one that istypically front and center is the worry that your credit rating willbe so damaged that securing a loan — even at a lousy rate —will be darn near impossible. But here's some surprising news: In many cases, the damagedone to one's credit score isn't nearly as bad as expected. Overthe long run, obtaining a score high enough to make you eligiblefor very competitive rates isn't out of the question.Part of the reason why your score isn't likely to suffer all thatmuch is that most folks seriously struggling with debt aren'texactly maintaining a top-notch score to begin with. "In virtuallyevery instance, the consumer will already have repaymentproblems such as late payments, very high balances, charged-offaccounts or collection accounts," says Rod Griffin, a spokesmanfor Experian, one of the three major credit bureaus. In light of this, some consumers may even see a slight boost intheir credit scores after filing bankruptcy, according to JohnUlzheimer, president of Credit.com Educational Services, aconsumer credit education group. Why? To start with, yourcredit report is largely wiped clean when you declarebankruptcy. Your high balances are removed as are any latepayments or records of unpaid debts. Instead, the accounts

Bouncing BackHere's how to raise your credit scoreas quickly as possible after declaringbankruptcy:

1. Damage controlMake sure all the accounts youincluded in your bankruptcy arelisted as such, and show $0balances if you filed Chapter 7, saysDetweiler. If a creditor continues toreport the account as delinquent —which they shouldn't — your creditscore would suffer.

2. Get new credit cardsThat's the most important step inyour bankruptcy recovery, Detweilersays. If you can't get approved for anunsecured credit card, start out witha secured card. With a secured card,you will make a deposit with thecredit-card issuer, which will inessence be your credit limit.Typically, after a year to 18 monthsof on-time payments, you could"graduate" to a regular, unsecuredcredit card.

3. PiggybackIf you have a trusted friend orrelative, ask them to make you anauthorized user on one of their creditcards. Your bankruptcy won't affectyour friend's credit, but you'llautomatically get the account historyfor that card in your report.

4. Bigger loansWhat about auto loans andmortgages? You can start shoppingfor auto loans as soon as a fewmonths out of bankruptcy, saysSteven Snyder, author of the book"Credit After Bankruptcy." Traditionalbanks are likely to turn you down,but the financing folks at thedealership may be more lenient,especially if they're in a bind to meetsales quotas. Mortgage lenders willwant to see at least two years ofgood credit behavior, according toSnyder.

included in the bankruptcy will be marked as"Included in Chapter 7 Bankruptcy" or "Included inChapter 13 Wage Earner Plan," depending on whichtype of bankruptcy you filed. Both types ofbankruptcy affect your credit score in the same way,according to Ulzheimer. Granted, you aren't likely tosee 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 overthe long term, as well. Here's why: When calculatingscores, the formulas developed by Fair Isaac (thecompany that calculates the most widely used creditscore, known as the FICO score) are set up to gradesomeone's credit standing as compared with that ofconsumers in a similar financial position. To do that,Fair Isaac divides consumers into 10 groups, usingwhat it calls "score cards." It then ranks theconsumers in each group based on the others in thegroup. One of these score cards is bankruptcy filers.(For competitive reasons, Fair Isaac doesn't releasewhat constitutes all 10 groups.)In other words, when you file bankruptcy your scoreis determined based on how you do compared withother bankruptcy filers, explains Fair Isaacspokesman Craig Watts. The reason? Fair Isaac hasfound this to predict credit risk better. "It's a muchfairer comparison," he says. "You're not comparedwith people with rosy, perfect reports."As a result, credit scores can run the gamut amongbankruptcy filers. "In that population, you'll findsome consumers who have very good FICO scores,some who have very bad FICO scores, and inbetween," Watts says. (Fair Isaac doesn't havestatistics on the average FICO score for bankruptcyfilers.) Granted, you won't be able to bring your scoreup to the perfect 850 as long as your bankruptcy staysin your report, but with good credit management afterfiling, a score in the 700s isn't impossible.

Then again, your credit score alone shouldn'taffect whether or not you decide to filebankruptcy. "You have to be realistic aboutyour ability to get back on your feetfinancially," says credit expert Gerri Detweiler,author of "The Ultimate Credit Handbook."Most experts would still say that if you can digyour way out of debt without declaringbankruptcy, that's a better way to go, since,among other things, you may be forced to sellcertain assets — in some states even your homeor car — to meet the bankruptcy filingrequirements. (This can be the case withChapter 7 bankruptcy, but not Chapter 13.)Another issue: Given the tougher newbankruptcy rules, you may not even be able todeclare bankruptcy.That said, if your debt payments are crushingyou, bankruptcy will give you a much-neededfresh start. And with a few clever credit repairstrategies, your score could be back in the 700swithin two or three years.