Will bankruptcy improve my credit score?

It might seem counterintuitive, but filing bankruptcy usually improves a credit score. The estimated 12 month post-filing credit score typically shows increases of from 25 to 100 points. Expect still greater improvement if post-filing credit is applied for, used wisely and bills are paid promptly.

This is for several reasons. The bankruptcy liquidates most debts and although the old debts are still listed on the credit report, they are indexed as discharged,. The debtor has been legally relieved of the obligation to repay the unmanageable burden. Another reason is that Chapter 7 discharge means that the debtor will not be able to re-file another Chapter 7 for 8 years from the date of discharge.

The credit score improvement is reflected in the fact that a post-bankruptcy creditor will not be competing with the old creditors for a share of the debtor’s income to service the debt. Then new creditor takes comfort that the Chapter 7 debtor will not be able to re-file and liquidate his debt for at least 8 years. This removes one of the risks to the creditor for the next 8 years. Also, the bankruptcy debtor has taken, and benefitted from, the required consumer credit and financial management educational courses.

My clients want to know when they will be able to apply for new credit to buy a car or purchase a home. I tell them your bankruptcy is a public record and each creditor may interpret it differently as they weigh your financial strength. An auto finance firm may be willing to take your application as soon as your bankruptcy discharge is issued by the court. A company making home loans may want to wait until 2 years have passed since your bankruptcy before considering your application.

The right to bankruptcy is enshrined in the U.S. Constitution at Article 1, Section 8, Clause 4. The founding fathers wanted you to have the advantage of being able to make a fresh start and to be a productive member of the economy free of overwhelming debts. After filing bankruptcy it is likely that you can anticipate your credit score to improve after your discharge is issued.