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Will filing bankruptcy affect my credit score?

Credit score will need to be rebuilt after individuals emerge from bankruptcy.

A discharge of debts from the U.S. Bankruptcy Court will remain on a person's credit report for as much as a decade, but as the years pass, the debtor can take steps to improve the low credit score that results.

Once a bankruptcy case is concluded, some debtors find their credit score - also known as FICO, named for Fair Issac & Company that developed it - may increase slightly. That's because many debtors have developed a bad payment history that lowers their score prior to bankruptcy and clearing away debt in the discharge may raise the score, but not enough to obtain new credit. Post-bankruptcy, many people have a score as low as 500 to 600, which will need to be rebuilt over time to regain a stable credit rating.

Since lenders won't provide credit to individuals with low scores, financial experts suggest repairing a bad score by signing up for a secured credit card. A secured card requires that the cardholder pay a certain amount to gain the same amount in credit - if they pay $300 to the lender, they will have a $300 credit limit. But their purchases and subsequent payments will be reported to credit agencies, thus rebuilding the debtor's credit history.

Of all the factors that influence the reports made to the three national credit agencies - Equifax, Experian and TransUnion - a person's payment history matters more than any other. Payment history is considered 35 percent of the credit score, amount of money owed counts for 30 percent, the length of a person's credit history counts as 15 percent and new credit and the types of credit used each count for 10 percent.

"Probably two or three years ago, a 720 was a pretty good score. Today's 760 is what a 720 used to be," Steve Ely, president of North American Personal Solutions at Equifax, told BankRate.com.

However, approval for new credit cards or car loans can occur within a couple of years after a bankruptcy, although at higher interest rates and fees.

"While a bankruptcy stays on one's credit for a period of seven years for a Chapter 13 and 10 years for a Chapter 7 [case], the bankruptcy effect weakens over time," writes Florida attorney Chip Parker on BankruptcyLawNetwork.com. "A two-year-old bankruptcy means more to creditors that a six-year-old bankruptcy because creditors are primarily interested in present financial circumstances."

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