Credit scores and bankruptcy - Will filing for bankruptcy improve my credit score in the long run?
To many of my clients' surprise, YES, filing for bankruptcy generally does improve one's credit score. There are a few reasons why this occurs.
First of all, typically, your credit score will NOT increase until derogatory marks are resolved. Thus a collection account on your credit report, in which you owe a creditor will continue to damage your credit until you either pay it in full/settled or the debt is discharged in a bankruptcy action. Your attempts to settle and pay off a collections account can take several months to years. Further, some credit collection agencies forget to close the account on your credit report, thus, it remains open for a longer period. Receiving a discharge from a Chapter 7 bankruptcy usually takes 4-6 months and, typically, you will only pay the legal fees and court costs of filing the bankruptcy. Thus, by filing a bankruptcy, you will not only save your money, but will also resolve your credit situation much quicker.
Secondly, most creditors will feel more secure lending to you if you are free and clear of debt and are generating income. After the discharge in a Chapter 7 bankruptcy, a debtor walks away with little debt remaining, if any. Creditors are then more likely to loan money to an individual with less debt than to an individual with a higher debt.
Third, an individual can file and receive a discharge in a Chapter 7 bankruptcy once every eight years. Thus, following a discharge, a debtor with no debt and who is generating income will look more favorable to a potential lender since the lender is aware that an individual can no longer file for and receive a Chapter 7 bankruptcy discharge on any new credit debt the creditor would provide to the debtor (at least until another 8 years).
For such reasons, an individuals credit score typically increases following the successful filing and granting of a discharge in a Chapter 7 bankruptcy.