Most clients I talk to believe that filing bankruptcy will ruin their credit score permanently. The truth is that most people who are considering filing bankruptcy already have a poor credit rating, and filing bankruptcy will not cause much of a decrease in their score. In fact, filing bankruptcy may be the first step in restoring them to creditworthiness.
There are many reasons that after filing Chapter 13 bankruptcy a debtor may find that their credit rating improves. For example, Chapter 13 bankruptcy requires the debtor to prepare a budget and consider what they spend their money on. It's amazing how many people have serious financial troubles but never take the time to consider what they spend their money on. After reviewing a written record of their income and budget in the form of their bankruptcy schedules many debtors realize that they reduce their monthly expenses.
Second, bankruptcy allows debtors to reorganize their debtors and pay many of them through a repayment plan. A Chapter 13 plan often reduces interest rates, lengthens repayment terms, and discharges debt with no repayment at all. The Chapter 13 plan allows debtors to pay their debts in a way that they can afford. As a result, after filing bankruptcy they are able to pay their bills on time, which is very important for improving a credit rating. By making payments on time, debtors begin to improve their credit score. In addition, a Chapter 13 bankruptcy indicates to creditors that the debtor is trying to improve their financial situation, rather than simply defaulting on their debts.
Chapter 7 bankruptcy may also improve a debtor's credit rating. Chapter 7 bankruptcy cases last between four and five months, after which most of the bankruptcy filer's debts are discharged. At the time of filing bankruptcy the debtor may experience a temporary decrease in their credit score, but the case ends quickly, and afterwards the debtor's credit score will rebound fairly quickly, assuming they pay their bills on time, maintain a job, and do all of the other things that improve a credit rating. Filing a Chapter 7 bankruptcy will usually allow debtors to improve their credit rating faster than if they simply allowed their debt to linger and remain unpaid for years.
If your goal is to improve your credit rating, bankruptcy should be considered. Credit ratings do recover after discharge, and many debtors will find that their ability to obtain credit improves after bankruptcy.
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