A common concern we have heard about bankruptcy is the negative impact it has on a person’s credit score. While this is always a legitimate concern, it has to be balanced against the cost and effect of letting out of control debt jeopardize or delay a return to financial stability. We have previously reported on a study by the New York Federal Reserve Bank showing that a bankruptcy improves the chances of returning to financial stability and creditworthiness after a few years. A recent study by LendingTree confirms and supports this. Their analysts looked at over a million LendingTree users, comparing those who filed bankruptcy in the past 7 years against those who did not. Here is what they found:
- Loan costs and rates are higher initially for those who file bankruptcy but this effect diminishes over time so that within 1 to 5 years, the credit scores have rebounded recovering part if not all of the initial loss.
- Even a few years after bankruptcy, borrowers may find themselves getting loan terms not much different from what others are offered. (In substantial part, this is because they have removed large debt burdens and have a better ability to pay new loans which cannot be discharged again for years)
- After 5 years, 75 percent of those who filed bankruptcy are eligible for new loans. Some achieve this much sooner.
- The difference in average scores of those who file bankruptcy vs those in similar situations who do not is less than 50 points and this difference narrows over time.
What the study apparently did not look at is the cost of not filing bankruptcy when needed. This can be substantial. For example, we have seen people who have lost their homes, depleted their protected retirement savings, or have done without needed medical care or medical insurance in a fruitless struggle to stay current on credit cards.
We always encourage our clients to carefully examine their budgets and their overall financial picture to make the right decision. Bankruptcy is not right for everyone, but in many cases may be better for everyone.