How a personal bankruptcy affects credit scores

Florida residents who are struggling to cope with overwhelming debt are often reluctant to file for bankruptcy for several reasons. Many fail to pursue this form of debt relief because they believe that filing under Chapter 7 or Chapter 13 will irreparably damage their credit ratings, but a discharged personal bankruptcy can sometimes make borrowing easier after a period of time.

Chapter 7 filings remain on credit reports for 10 years, but the impact they have on credit scores declines significantly after just two years. Seeing a discharged bankruptcy on a credit report tells lenders that the consumer involved is no longer obligated to pay certain debts, and lenders also know that consumers often borrow cautiously and pay their bills diligently following a bankruptcy. Consumers can also take advantage of options such as secured credit cards to rebuilt their credit ratings following a bankruptcy.

The Federal Reserve Bank of Philadelphia looked into the effect that filing a Chapter 7 bankruptcy has on credit ratings. Researchers studied the Equifax reports of borrowers who filed Chapter 7 petitions in 2010, and they found that their average credit scores actually increased from 538.2 to 620 once the bankruptcies had been completed. This generally takes between six and eight months.

Attorneys with experience in this area may be able to dispel many of the myths surrounding personal bankruptcy. They could explain that the assets of borrowers who file a Chapter 7 bankruptcy are rarely seized, and they could ease fears that Chapter 13 payment plans do not leave enough money individuals or families to live on comfortably. Attorneys with debt relief experience could also point out that filing for bankruptcy stops collection calls and creditor harassment and prevents lenders from garnishing paychecks.

Source: Nerdwallet, “5 Bankruptcy Myths Dispelled”, Sean Pyles, June 7, 2016