Whether or not filing bankruptcy will hurt the filer’s credit score depends on whether their credit rating is already low. A typical bankruptcy filer has a significant amount of debt and has already defaulted on several accounts. If this is the case then filing bankruptcy will not affect the debtor’s credit score. Their credit score is already in bad shape and filing bankruptcy will not cause it to go much lower.
When potential or existing clients ask me this question, I ask them to consider where their credit score is today and where it will be in five years if they don’t file bankruptcy. Typically, a person considering filing bankruptcy has debt that cannot be easily resolved, or else they wouldn’t be considering filing bankruptcy. If they choose not to file, then five years from now, the debtor will most likely owe as much or more as they do now, and have five years of negative payment history, due to their inability to pay their debt. Paying bills late or not at all are factors that hurt a credit score.
If that same person were to file bankruptcy, in five years (or even four months) they could discharge most or all of their debt. Discharging debt changes a person’s credit to debt ratio significantly. Soon after the discharge order, if a creditor was to pull a debtor’s credit report they would find that the debtor is no longer liable for much of their debt. Borrowers with little or no debt are much more desirable to lenders than borrows with significant debt.
In addition, once all that debt is discharged the debtor will be better able to pay his monthly household bills, such as utilities, mortgage, and car note. Paying these creditors on time allows the debtor to establish a positive payment history, which is one factor that is considered when calculating a credit score. Most of my clients report that their credit score increases 50 to 100 points during the first year after filing bankruptcy. The bottom line is that filing bankruptcy might hurt a person’s credit score at first but if the goal is to obtain a good credit score, then filing bankruptcy may get you there faster than not filing.