Bankruptcy Improves Credit

The truth about bankruptcy

For a long time we have been telling you that bankruptcy improves credit.

bankruptcy improves creditOur opinion was based on the feedback from our bankruptcy clients. While we felt right about what we said, we could not prove it. Or, at least not prove in a statistical scientific way that bankruptcy improves credit. Now, a study made by economists at the Federal Reserve confirms that we were right. It is a fact that bankruptcy improves credit. Let’s look at the study to understand the conclusion.

Approximately 15% of the U.S. population has filed for bankruptcy at some time. The Fed study analyzes statistics for people who received a Chapter 7 discharge to people who received a Chapter 13 discharge, to people who filed a Chapter 13 that ended in failure.

The credit score of the average debtor (measured by Equifax) drops almost 100 points over the four years before filing. But after filing, the credit score begins to recover.

Factors that may account for why bankruptcy improves credit

For successful Chapter 7 and Chapter 13 filers, the recovery is probably helped by a person’s discharge of debt. Some delinquent debts wind up dropped from your report after you file bankruptcy. Also, credit grantors know that bankruptcy leaves most debtors in a  better position to repay new credit. Credit grantors also know that bankruptcy puts limits on a person’s ability to file again in the near future.

Bankruptcy Improves CreditOver the long haul, debtors rebuild their credit back to initial levels. The healing process takes time.

However, the Federal Reserve study establishes that bankruptcy improves credit opportunities for persons who have already wrecked their credit.

(You may also want to read our previous post, Bankruptcy and Keeping a Good Credit Score are Possible.)

Finally, the study also shows that over time there is a bump upwards in available credit limits for successful bankruptcy filers.

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Leon Bayer and Jeffrey Wishman are Los Angeles Bankruptcy attorneys. They have been practicing bankruptcy lawyers in Los Angeles for 37 years and are Certified Bankruptcy Specialists by the State Bar of California. These are lawyers who bring experience, skill and creativity to the highly complex area of bankruptcy law. At this Los Angeles law firm, the your initial consultation with an expert is free. Mr. Bayer is a coauthor of Nolo's The New Bankruptcy: Will It Work for You?, authors the “Ask Leon” series on Nolo’s Bankruptcy, Debt & Foreclosure blog, and writes on bankruptcy topics for Nolo’s website. In addition, Mr. Bayer devotes a significant number of hours to volunteer legal services. The State Bar of California has commended Mr. Bayer for this work every year since 2004.