Tennessee residents who are struggling to cope financially sometimes do not file for bankruptcy because they worry about the impact that doing so would have on their credit ratings. While personal bankruptcies remain on credit reports for seven or 10 years, the impact that Chapter 7 has on credit scores diminishes significantly after only two years.
Consumers often fear that pursuing debt relief could make future borrowing difficult or impossible, but lenders may actually be more willing to extend credit to individuals who are no longer obligated to pay debts that they have struggled with in the past. Lenders also know that many individuals who file are thankful for the fresh start they have been offered and are reluctant to take on new debt unless they are sure that they can afford the monthly payments.
The impact that filing a Chapter 7 bankruptcy has on consumer credit scores has been studied by the Federal Reserve Bank of Philadelphia using data provided by Equifax. The bank found that the average credit score of individuals who filed Chapter 7 bankruptcies in 2010 was 538.2, but their credit scores rose to an average of 620 after their bankruptcies were discharged.
Attorneys with experience in this area could explain that struggling to cope with unmanageable financial situations can do more harm to credit ratings in the long term than filing for bankruptcy. They could also point out that there are a number of borrowing options, such as secured credit cards, that are designed to help people who have had financial problems in the past to reestablish their credit. Filing also stops harassing calls from bill collectors and prevents creditors from garnishing paychecks.
Source: Nerdwallet, 5 Bankruptcy Myths Dispelled, Sean Pyles, June 7, 2016
