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Bankruptcy is often a good thing

Bankruptcy often receives bad press. Let's look at one of the most common criticisms. Individuals are warned that it will play havoc with their credit. Of course, a bankruptcy filing will be reflected on your credit reports and your credit score. But this is unlikely to be the catastrophic event it is often made out to be.

For one, anyone seriously looking a filing a bankruptcy is likely already in desperate financial condition. They are unlikely to possess a FICO score above 800 with a great deal of income and minimal debt. For such a person, filing a bankruptcy probably could damage their credit score in a meaningful way.

But if you have been struggling to pay your bills, have had medical problems and the bills that go with them, lost a job or had your marriage fall apart with a divorce, your credit score is likely already reflecting the increase in debt, late payments or other delinquencies.

If you file a bankruptcy, you are cautioned that you may have a difficult time obtaining credit. Maybe. However, if you have less income, you probably do not want a lot of credit, as it has to be repaid with interest and that interest will be expensive. After you file a bankruptcy and receive your discharge, you want to limit your spending to what you can handle to avoid becoming overwhelmed a second time.

Because the need for a bankruptcy if often triggered by a one-time event, such as illness, job loss, or divorce, after your bankruptcy you can begin rebuilding your credit. The advantage of the bankruptcy is that instead of spending years paying old debts, you can devote your income to keeping your bills current and paid in full, which may result in faster recovery of your credit score than years spent attempting to pay overwhelming debts.

Source: lifehacker.com, "What Really Happens When You File for Bankruptcy," Kristin Wong, June 14, 2016

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