Does bankruptcy hurt your credit score?
Last week, The Federal Reserve Bank of New York released a study of people who did, and didn’t, file bankruptcy. They asked themselves, “does bankruptcy hurt your credit score?”
The results didn’t surprise me, but they might startle you. Bankruptcy helps!
Comparing people in financial trouble who filed bankruptcy and people who kept struggling, these economists who work for the New York Fed found that for most people, filing bankruptcy was better.
Here’s what they said. “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.”That’s worth repeating. People who file bankruptcy “experience a sharp boost” in their credit scores after bankruptcy. People who struggle to pay see their scores improve much less.
Their conclusion: “insolvent individuals who do not go bankrupt exhibit more financial stress than those who do.“
You can read the whole report here New York Fed Economist Study of Bankruptcy.
The 2005 Bankruptcy Law Made Bankruptcy Harder for Poor People
PS One other point from this study that’s really important. The 2005 bankruptcy reform was sold as way to keep high income people from filing bankrupt. What it did was keep lower income people from filing.
Why did bankruptcy reform hurt poor people the most?
Making the paperwork harder for everybody, the 2005 law raised the cost of bankruptcy. Now, many people who really need bankruptcy, can’t afford it. That’s what lots of us said at the time. You can read more about that, here.
PPS The Philadelphia Fed Weighs In
It is must bankruptcy month at the Federal Reserve. Coming just a week after the NY Federal Reserve paper, the Philadelphia Federal Reserve released a study on bankruptcy and credit scores.
In Philadelphia they compared credit scores with chapter 7 bankruptcy and chapter 13. In both kinds of bankruptcy “Credit scores start to recover dramatically before the date on which debt is discharged.” What?!? Even before the bankruptcy is finalized, people’s scores start to recover dramatically.
The report went on to say that credit limits will be lower than they were before filing bankruptcy. And that credit scores improve quicker under chapter 7 than they do under chapter 13. You can read all about it, in this weeks release, here. The full report, done in August 2014, is here.
So, does bankruptcy hurt your credit score? No!
We have two different studies, sponsored by two different Federal Reserve banks, that came to the same answer.
Bankruptcy does not hurt your credit score. The New York study said you get a “sharp boost” in your score. The Philadelphia study said your scores improve “dramatically.”