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The surprising truth about Chapter 7 and your credit score

On Behalf of | Mar 25, 2020 | Firm News

You are likely reluctant to file for bankruptcy because you have heard that it will destroy your already dismal credit score. It is like comparing credit card debt to drowning, and Chapter 7 to pushing your head further underwater for seven years. 

However, we have seen that many who file start to see their FICO scores come back around relatively quickly. Before you allow fear to drive your head further into the sand, read on; the truth may surprise you. 

What happened to real people’s credit scores during bankruptcy? 

NerdWallet cited a study of people who filed for Chapter 7 bankruptcy. At the time of their filing, on a credit scale of 280 to 580, they averaged a score of 538. However, in as little as six months, their scores had already rebounded to an average of 620 while they were still going through the process. 

At this point, we need to be clear: If you file for either Chapter 7 or 13 bankruptcy, it will limit your borrowing options, and the credit you can get will be more expensive. Still, that might be easier for you to swallow when you know your FICO score is already on the way up. If you keep doing the hard work, when the bankruptcy record finally falls off your credit report, you could be in great shape for a mortgage or auto loan. 

Can I still improve my score if I avoid bankruptcy? 

Sure, but consider this first: The New York Federal Reserve conducted a study of two groups of people in similar financial situations. The first group filed for bankruptcy, and the second did not. 

After three months, the group that filed averaged a credit score improvement that was 80 points higher than the group that did not file. After a year, the group that filed was still outperforming by 60 points. 

Furthermore, over half of the filers were rebuilding their history with new lines of credit after 12 months. Compare that to less than one-third of the non-filers. 

We may be able to give you encouraging statistics, but we cannot adequately describe the feeling of relief and freedom you will most likely experience once the debt monkey is off your back. If you would like more information on solving credit card debt or bankruptcy, please visit our website.