Thomas F. Miles, Attorney and Counselor at Law
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How will personal bankruptcy impact credit scores?

When considering filing for bankruptcy, the primary concern for many California residents is how the move might impact their credit score. There can be no doubt that pursuing personal bankruptcy will lower one's score, but there is more to the story beyond that simple fact. For many consumers, this is a negative effect of what can be an overwhelmingly positive financial choice.

Let's begin with the unpleasant truth: a bankruptcy is going to lead to a large and lengthy ding on one's credit. For those who file for Chapter 7, the bankruptcy will show on credit reports for 10 years. Those filing Chapter 13 can expect the bankruptcy to drop off in seven years. In both instances, credit scores will initially drop, although that damage can be repaired over time.

The often-overlooked part of this scenario is the fact that, for most consumers, their credit score tanked long before the need to file for bankruptcy became urgent. Late payments, high balances and a variety of other matters have likely decreased one's score for months or even years prior to filing for bankruptcy. For those who attempt a repayment plan, it can take a significant length of time to undo the damage caused by these factors.

A California resident who files for personal bankruptcy will experience an initial decline in credit scoring, but he or she will also experience the elimination of many forms of consumer debt. The end result is the freedom within one's monthly budget to pay down other debts on time and even to open one or more new lines of credit. The ability to rebuild one's credit standing is bolstered, and financial stability can be regained much faster than taking a slow and uncertain path toward repayment.

Source: Investopedia, "Bankruptcy Consequences", Greg Daugherty, Oct. 8, 2014

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