Bankruptcy & Credit Scores: Short Term Pain For Long Term Gain

Many people believe that filing for bankruptcy is like dumping toxic waste on their credit scores–instant and long term damage to their future financial landscape. While filing for bankruptcy can disrupt your credit scores in the short term, a Consumer Financial Protection Bureau report shows data that would dispute the notion that filing for bankruptcy is a death sentence to your credit scores.

According to their findings, median credit scores actually showed a steady increase in the years following bankruptcy petitions. The scores of Chapter 7 filers tend to recover faster than Chapter 13 filers, but that is expected based on the ways that the debts are discharged. 

Credit scores also have a better chance of improving over time by engaging in positive credit behaviors.

These include:

• Paying Bills On Time: Consistently paying bills on time can gradually improve your score.
• Reducing Debt: Lowering your debt-to-income ratio can also have a positive impact.
• Being Cautious with New Credit: Opening new accounts cautiously and maintaining low balances relative to credit limits can help.
• Monitoring Credit Reports: Regularly checking credit reports for errors and correcting any inaccuracies.

It’s important to note that rebuilding credit after bankruptcy takes time and consistent financial discipline. The path to recovery varies for each individual based on their unique financial situation and habits. 

Ultimately, maintaining a better balance sheet (what you owe and what you own) is going to be a better barometer of your overall financial health than high credit scores. After bankruptcy, your debt will be significantly reduced, meaning the “what you owe” side of the balance sheet should be much less. Cleaning up that debt-to-income ratio will go a long way when it comes time to further rebuild your credit.

Make sure to keep an eye on your credit reports as well.  Keeping the information accurate after your bankruptcy is key to making sure your credit scores reflect your efforts to fix your finances. It’s also important to remember that trying to improve your credit scores is not a good reason to file for bankruptcy. Taking the time to understand your personal financial situation is what will determine if filing for bankruptcy is your best option.