How Fast Credit Scores Improve
Federal Reserve Bank researchers tracked stats from Equifax, a major credit bureau. It showed that credit scores tend to drop around 18 months before a bankruptcy filing, but increase gradually afterward. The findings revealed the average credit score for Chapter 7 bankruptcy, a type of bankruptcy that liquidates assets, in 2010 was 538.2. The score increased to slightly over 620 in several months.
Chapter 13 bankruptcy involves slowly repaying debts within three to five years. Most filers don’t complete the payment plan either getting dismissed or converted to Chapter 7. The ones who manages to complete Chapter 13 saw an increase from around 535 to 610.
A FICO study didn’t show significant increases in credit scores. For bankruptcy filings between October 2009 and October 2010, the score only increased by 10 points. The study found after two years, 28% of bankruptcy filers reached a score of 620. About half of filers had a score of 620 or greater, while 1% increased their score to 700 after four years.
Studies show when debtors got 120 days behind on debt, the number of court judgments and delinquent balances increased. Debtors who filed bankruptcy got the benefit of the automatic stay, which stops collection efforts.
Chapter 7 doesn’t erase all debts, such as student loans, but it can make debts easier to repay when other debts get discharged. Getting new credit accounts can be difficult since the bankruptcy stays on the credit report for 10 years. However, most bankruptcy filers may be able to get them after 18 months.
Bankruptcy laws are complex, and certain actions may get the case dismissed. Consulting a consumer bankruptcy attorney could help avoid these problems.