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Can filing a bankruptcy improve your credit score?

Maybe. While much of the credit industry uses frightening talk of lower credit scores and inability to obtain credit or loans, the reality is that a loan of any type is always an economic transaction.

To receive the loan, the lender must determine that you have sufficient income to make the necessary payments during the term of the loan. This is a mechanical calculation, stripped of many of the "value" judgments that are often implied regarding a bankruptcy filing.

Almost 60 percent of bankruptcy filings in recent years involve a component of medical debt, and those debts are mostly due to random bad luck and the type of health care insurance you have.

The credit industry likes to scare people into believing that if they file for bankruptcy their financial life will be ruined and they will forever have trouble obtaining credit or loans. They want to shame individuals into paying overwhelming debts for as long as possible.

What they don't mention is that once you have completed a bankruptcy, assuming you are working and earning an income, you no longer have all of your disposable income tied up making old debt payments.

Creditors are always self-interested. While they may worry that you had trouble paying previous debts, they will review your financial history and see that something like a large medical debt triggered your bankruptcy, they also know that you cannot easily refile another bankruptcy immediately and that the majority of your old debts have been discharged.

This means you now have the cash to make payments on a new debt. This renewed ability to pay your bills could be why the Federal Reserve Bank of Philadelphia found  credit scores often rapidly improved in a review of the credit scores of individuals who had filed a Chapter 7. They found that average credit scores went from 538.2 to 620 within about a half year after the bankruptcy was finalized.

Your bankruptcy attorney can explain many of the details and how a filing may affect your financial condition, but in many cases, it will not be the doom and gloom the credit industry suggests, but the fresh start promised by the Bankruptcy Code.

 

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