Why Does Bankruptcy Have a Bad Reputation?
The answer probably goes back to the early days of credit reporting and the criteria lenders used when deciding to make a loan. Back in the late 1800s and even up through the 1970s, lenders took a more social approach to determine creditworthiness. Back then, either the lender new you or had done business with you in the past and could vouch for you, or he would contact someone that knew you, much like a reference on a résumé. For example, in 1899, Equifax, the oldest credit reporting agency in the country, collected all kinds of data, including personal details like marital troubles or political opinions. So, if word got out that you filed for bankruptcy, your reputation probably was likely ‘ruined’ for a time because that may have been all the information a lender had to base its lending decision on.
FICO
Then, in 1956 Bill Fair teamed up with mathematician Earl Isaac to create the Fair Isaac credit scoring system, what we today call FICO. This credit scoring system was (and is) intended to be an objective way to determine one’s creditworthiness using payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries. Now, instead of being turned down for a loan by a loan officer who is simply having a bad day or had not had his first cup of coffee yet, lenders now simply look at your FICO score to determine creditworthiness.
What Does This Mean Today?
Today, a bankruptcy on your credit report does not carry near the weight it may have decades ago. The average credit score for a typical bankruptcy client in our office is between 550 and 650. After bankruptcy, clients have reported to us that their credit score is up anywhere from 50 to 150 points in just a few months. Much of this increase is due to the debt being eliminated. Of course, credit scores will continue to go up over time while staying out of debt and paying all your debts on time. But the bottom line is, depending on your credit score at the time of your bankruptcy filing, your credit score will go up very quickly after a bankruptcy filing. Only in rare cases have we seen a credit score decrease after filing bankruptcy. Those are usually cases where clients have particularly good scores to begin with.
Bankruptcy is a Financial Decision
If you have debt that you are having trouble effectively managing, there is certainly nothing wrong with considering bankruptcy. Bankruptcy is not a bad thing. As you know, being in debt can be stressful and lead to other life issues, such as divorce, health issues, and depression. Not enough people take advantage of our generous bankruptcy laws. If the numbers are not adding up for you, your spouse, or your family, speak to a bankruptcy lawyer. Most offer a free consultation, too. Even if you do not file bankruptcy, at the very least you will walk away with valuable information about your situation from your lawyer. Don’t worry about bankruptcy and your credit score, it will get better when the debt is gone. Get debt-free to be stress-free.