Contrary to popular belief and what the big banks and credit card companies tell you, filing for bankruptcy improves credit. The reason is simple, when we eliminate the debt owed, we are essentially paying off all the debt and when the debt is gone, the credit score goes up. Now, the actual filing of the bankruptcy case itself may cost a few points on the credit score, but it is usually offset by the discharge of the debt.
Like most people today, you’ve done your research online, but you’re still not entirely sure how a bankruptcy case affects your credit. I guess the answers you find depend on who is speaking. Creditors and banks will tell you that filing for bankruptcy is the worst thing for your credit and will convince you to do everything you can to avoid it, but why do they tell you that?
Consider the fact that those same banks were “too big to fail” during the Great Recession of 2008. It’s also the big banks that had their lobbyists fight for changes to the Bankruptcy Code in 2005. Some of those big banks credit cards want to know “What’s in your wallet?” because they want you to take their credit cards there.
These big banks want you to fear bankruptcy like the plague because they can charge you interest for as long as you have a balance on your credit card. If you went bankrupt, they would lose and you would win. Now, if you’re like many of my clients, you probably feel a moral obligation to pay your debts, and I can certainly appreciate that. However, the United States Constitution, the Bible, and the Bankruptcy Code all provide for debt discharge.
Please note that the bankruptcy case will remain on your credit report for 10 years if filed under Chapter 7, and seven years if filed under Chapter 13 of the Bankruptcy Code. Also, you can easily get credit after bankruptcy, but I’m biased on credit and debt after bankruptcy because I see cycles and patterns in debtors having trouble managing debt after bankruptcy when their budgets don’t have room for it. I know of at least two non-standard credit card issuers, Merrick Bank and Orchard Bank, that will issue credit cards to people immediately after filing for bankruptcy.
Remember that no one gets rich from credit cards and your credit score only tells others how well you handle debt. If you’re out of bankruptcy, improving your credit requires a few things. Keep no more than 4 accounts open at any one time. This can be any combination of mortgages, student loans, and credit cards. Do not charge more than half of the available credit line and pay off the card every month. About five years after your bankruptcy case, you should be able to get standard bank credit cards again. I hope you find this information useful and I wish you much financial success.