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The effect of bankruptcy on credit scores

Kentucky residents sometimes continue to struggle financially because they worry that filing for bankruptcy will do irreparable harm to their credit ratings. While pursuing debt relief will have an impact on the credit scores handed out by companies like Equifax, Experian and Trans Union, the effects are not nearly as severe or long-lasting as many people believe.

Individuals who file for bankruptcy have usually been struggling with unmanageable financial situations for some time, and this means that their credit scores will often have plummeted long before they file. Individuals with overwhelming bills may be hesitant to seek relief because they fear that doing so would make it extremely difficult for them to borrow in the future, but a study from the Federal Reserve Bank of Philadelphia suggests that these fears are unfounded.

While bankruptcies remain on credit reports for up to 10 years, lenders generally pay little attention to them after about two years. The Federal Reserve Bank of Philadelphia studied the impact that filing under Chapter 7 has on borrower credit scores. The Equifax credit scores of individuals who filed Chapter 7 petitions in 2010 increased from an average of 538.2 when they filed their bankruptcies to 620 when their cases were discharged, in many cases within a period of just a few months.

Lenders know that consumers who file for bankruptcy usually proceed cautiously thereafter, and attorneys with experience in this area could point this out to individuals who are reluctant to take action due to credit concerns. Attorneys could also remind those with overwhelming debt that there are a number of financial tools available that are designed to help consumers rebuild their credit profiles.

Source: NerdWallet, 5 Bankruptcy Myths Dispelled, Sean Pyles, June 7, 2016

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