By Cathy Moran, Esq. (Redwood City, CA)
After bankruptcy, credit scores go steadily up, says a 17 year study released by the Consumer Financial Protection Bureau.
Got that? Go UP. Every year.
Importantly, credit scores start improving the same year that the bankruptcy is filed.
Think on that for a moment.
How collectors stoke fears about bankruptcy
Creditors and their shills shout that bankruptcy trashes your credit score; the data shows just the opposite. There’s no dip post filing, but instead an immediate uptick.
This is how the CFPB puts it:
Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition.
Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings.
Bankruptcy improves your balance sheet
Let’s be clear about what is important in your financial health. Your credit score is far less important in the big picture than your balance sheet.
Credit scores are a side show
A balance sheet looks at what you own and what you owe. That’s the information that appears on a loan application.
Ditch the debt in bankruptcy and there’s less debt to weigh down your net worth.
Goose your credit score
You can take actions that may increase the rate of improvement.
Remember that credit scores are based on credit reports. And credit reports are notoriously inaccurate.
A government study in 2012 found that between 20 and 25% of credit reports had material errors.
Rest assured that the rate of errors on your credit report does not go down when you file bankruptcy. That’s why you should pull your credit report a few months after you get your discharge, and look for errors.
Attorney Mike Cardoza lays out how to do that in How To Spot Credit Report Errors After Your Bankruptcy & Fix Them.
Is bankruptcy the right choice
Just because bankruptcy may improve your credit score is not a reason to file bankruptcy. It’s just an issue to take off the list of reasons not to file.
Lots of different facts influence whether bankruptcy is right, and whether the time is now.
I look at those factors in What Kenny Rogers Teaches Us About Getting Out Of Debt.
Cathy Moran has headed her own small firm Moran Law Group in Mountain View, California, for nearly 30 years. Family law and tax issues as they play out in bankruptcy are areas of particular interest to Cathy.