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The impact of discharged bankruptcies on credit ratings

Virginia residents sometimes struggle with overwhelming debts for years on end because they are convinced that filing for bankruptcy is ruinous to credit ratings and makes future borrowing extremely difficult, but data shows that this is rarely true. While bankruptcies remain visible to lenders for as long as 10 years, they are not usually a significant handicap to obtaining credit. There are also financial options, like secured credit cards, that are designed for consumers who are either establishing or rebuilding their credit profiles.

The impact that Chapter 7 bankruptcies have on credit ratings has been examined by the Federal Reserve Bank of Philadelphia. Researchers looked at the Equifax credit scores of individuals who made Chapter 7 filings in 2010, and they noticed that discharged Chapter 7 bankruptcies actually increased credit scores by an average of 82 points from 538 to 620.

Bankruptcies may not adversely affect borrowing even when credit scores remain low. Lenders are aware that individuals with discharged bankruptcies have been released from certain obligations and will likely borrow cautiously in the future. They also know that consumers who have pursued personal debt relief must wait several years before filing for bankruptcy again.

Attorneys with experience in this area may be familiar with many myths surrounding bankruptcy. Fears over credit scores are often paired with concerns over asset seizures, but filing for personal bankruptcy is a way to stop creditor harassment and prevent debt collectors from garnishing paychecks and filing lawsuits. The two primary forms of consumer bankruptcy are Chapter 7 and Chapter 13, and an attorney can summarize the eligibility requirements of each.

Source: Nerdwallet, "When Bankruptcy Is the Best Option", Liz Weston, May 23, 2016

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