When does bankruptcy make the most sense?

| Oct 15, 2020 | Bankruptcy |

Bankruptcy allows consumers in Wisconsin a legal a legal way out of debt. Many debtors hesitate to file because of the hit to their credit scores. However, when most debtors file bankruptcy, their score has already lowered significantly. After the bankruptcy discharge, debtors commonly see their credit scores rise within a year.

How long does it take credit scores to rise?

Research from the Federal Reserve Bank in Philadelphia used statistics from Equifax, a major credit reporting bureau, to study credit scores after bankruptcy. The study showed that credit scores decreased 18 months before declaring bankruptcy and indicated a steady increase after debt discharge.

Data revealed that the average score of consumers who filed Chapter 7 bankruptcy, based on a scale of 280 to 850, averaged slightly above 538 in 2010. Scores under 600 are commonly considered poor credit. The scores typically increased to an average of 620 within six months.

The same study revealed that consumers who filed Chapter 13 bankruptcy showed a credit score increase from around 535 to 610. Half of Chapter 13 bankruptcy cases had been dismissed, and 12% got converted to Chapter 7 in 2013.

Other reasons to file bankruptcy

A study showed that when a consumer falls behind more than 120 days on one account, the impact worsens. The debt commonly gets sent to collections. Bankruptcy puts a stop to collection efforts with the automatic stay.

Bankruptcy may erase certain unsecured debts, such as medical debt, credit cards, overdue rent and past-due utilities. In most cases, debts such as alimony, child support, debts owed because of willful injury, recent tax liens and tax debts cannot be discharged.

Most consumers want to pay their debts, but it sometimes gets impossible. In these cases, bankruptcy may be the best option. An attorney may be able to assess a person’s case and determine whether bankruptcy would benefit their situation.