Many people do not file bankruptcy because they fear that it will ruin their credit score.  The reality is that by the time most people start thinking about filing bankruptcy, they already have a poor credit rating, and for those people, filing bankruptcy may in fact improve their credit rating.

There are several reasons why debtors who file Chapter 13 bankruptcy may notice that their credit rating improves soon after filing bankruptcy.  First, Chapter 13 bankruptcy reorganizes debts through a plan that allows repayment of a portion or all of the person’s debts in a way that they can afford.  By making payments on time, debtors begin to improve their credit score.  Second, many debtors file Chapter 13 bankruptcy in order to stop foreclosures.  A Chapter 13 bankruptcy filing looks much better on a credit report than a foreclosure.  It indicates to creditors that the debtor is trying to repay their mortgage arrears, rather than simply defaulting on their mortgage loan.

Chapter 7 bankruptcy will usually improve a debtors credit rating as well.  Chapter 7 bankruptcy cases are generally completed within four or five months after filing the case.  After the debtor receives a discharge, their credit report is largely wiped clean, and the records of unpaid debts and late payments are removed from their credit report.

If your goal is to improve your credit rating, bankruptcy should be considered.  I speak with dozens of people each month about their financial situation, and for many of them bankruptcy is not the best choice.  Everyone’s financial situation is different, and it is important to consult a competent bankruptcy attorney before deciding to file bankruptcy.