A February 2015 study by the Federal Reserve Bank of New York looked at households in financial distress who are in or descending into insolvency, and compared the results of their filing bankruptcy vs not doing so. Insolvency after the 2005 Bankruptcy Reform. Most of these households were facing lawsuits or collections, unpaid medical bills, and not enough money to pay these debts. Surprisingly, after a year to a year-and-a-half, those who filed bankruptcy had better credit scores and better access to credit!
Here is what the study found:
- “both the balances in collection and the fraction of individuals with court judgments grow after insolvency for individuals who do not go bankrupt, whereas bankruptcy filing immediately stays collection efforts and court judgments”
- individuals who filed bankruptcy had better access to new credit, opening “a larger number of new unsecured accounts.” NOTE: this does not account for how favorable or unfavorable the credit terms were. Most likely these are high interest credit card accounts. Because a bankruptcy discharge bars another bankruptcy discharge for 4-8 years, this makes sense, as compared to those with unmanageable debt.
- For those who were “newly insolvent… the individuals who do go bankrupt have lower credit scores than those who do not go bankrupt, which is consistent with them having a higher default risk”
- BUT by a year post-bankruptcy, “the individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy, whereas the recovery in credit score is much lower for individuals who do not go bankrupt. “
This coincides with what we have been saying for a long time. A bankruptcy may be a better option for those who are drowning in debt with no realistic prospect of turning things around. Either way, the goal is to get back to financial stability and financial health.
Too many people put off consideration of bankruptcy as an option, and end up making things worse for themselves and their families.
The starting point is a consultation with a qualified bankruptcy attorney who will take the time to help you review your budget and your options. Properly done, this easily takes an hour.
Whether or not bankruptcy is right for you, our firm is available to help.