Bankruptcy and Credit: The Real Impact of Bankruptcy on Your Credit Score

Many people considering bankruptcy hesitate for fear of damaging their credit scores. The real impact of bankruptcy on your credit score may surprise you. Credits scores often improve an average of 80 points immediately after bankruptcy. But why?

A credit score is composed of 35% payment history; 30% amounts owed; 15% length of credit history; 10% new credit; and 10% credit mix. Bankruptcy erases the “30% amounts owed” category by virtue of your discharge order in bankruptcy. That’s the simple answer as to why your credit score increases.

If you do file for bankruptcy, it’s not the end of your financial life.

Your credit score is likely to improve in the months after filing. An August 7, 2014 report from the Federal Reserve Bank of Philadelphia found that the average credit score among those who filed Chapter 7 bankruptcy in 2010 went up more than 80 points — from 538.2 to 620.3 — between when they filed and when their cases were discharged.

The following clients filed bankruptcy in the past 12 months and they have had no trouble re-establishing their credit scores:

Client # 1        

Current Score: 463

12 Month Post-bankruptcy Credit Score: 626

Net Credit Score Effect: + 163

Client # 2        

Current Score: 556

12 Month Post-bankruptcy Credit Score: 663

Net Credit Score Effect: + 107

Client # 3        

Current Score: 575

12 Month Post-bankruptcy Credit Score: 661

Net Credit Score Effect: + 86

Still curious.  Read an article by the Economists at the Federal Reserve Bank of New York who stated: “The individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy.” You can read the whole report here: New York Federal Reserve Bank Economist Study of Bankruptcy.

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