Filing for bankruptcy often brings up feelings of defeat, but the process can be an incredibly empowering and liberating experience. With the proper guidance and resources, filing for bankruptcy can set you on the path to improving your credit score and establishing long-term financial security. Understanding how bankruptcy works can help you make the best decision.

Why People File for Bankruptcy

As a bankruptcy lawyer practicing for over 26 years, I know long-term financial mismanagement rarely causes bankruptcy. I can recall only one person who tried to hire me because he was in over his head due to dishonesty (for the record, I sent him away). Most people file for bankruptcy because life took an unexpected turn one too many times.

Statistics show that medical debt, job loss, and divorce are the most common reasons for people filing for bankruptcy. For people confronting these common financial problems, a solution as simple as filing Chapter 7 bankruptcy to eliminate their debts can radically improve their lives quickly. In addition, chapter 13 offers the chance to reestablish an affordable repayment plan to catch up on bills or save a home from foreclosure.

How Debt Impacts Your Credit Score

Though your credit score varies based on the scoring model, 5 factors affect your credit scores. According to Experian, those factors are:

  1. Payment history;
  2. The percentage of your total credit limit that you owe;
  3. How long you’ve held credit accounts;
  4. Your credit mix;
  5. The number of times you’ve applied for new credit recently.

Of these five factors, your payment history has the most significant impact on your credit score. This is because lenders want to see that you are responsible for repaying debt, so late payments will significantly affect your score. Even one late or missed payment will cause a significant drop in your credit score.

Your credit utilization ratio, your total debt relative to your available credit, significantly impacts your credit score. Generally, a low credit utilization ratio signals that you can handle your existing debt. Conversely, your credit score declines when you rely too heavily on your credit to meet your regular living expenses.

Rebuilding Credit Requires Getting Out of Debt

Getting out of debt is the first step to rebuilding your credit score. To do that, you need to cover your monthly expenses while also paying down your debts. Creating a budget will help you manage your income and expenses, but only if you have enough income to cover all the expenses.

Personal finance experts typically advise consolidating debts into one monthly payment. However, this strategy is effective only if your credit score is high enough to qualify for a loan with a lower interest rate. In addition, even if you are eligible for a debt consolidation loan, your income has to support the ability to make payments.

Without good credit, it’s wise to question the financial wisdom of struggling to pay these high-interest debts.

Rather than spend years with lousy credit and stretch every dollar as you repay old debts, consider whether bankruptcy would accomplish your goals.

How Fast Can Your Credit Improve?

Your credit score will increase once you’ve resolved all your outstanding debts and brought the balance to $0. The faster you can accomplish that goal of being debt-free, the sooner your credit will improve.

If you have a lot of past-due debt, it will probably take years to pay it off. During that time, not only will your credit score remain low, you won’t be able to build your savings because all your extra money will go to the creditors.

In contrast, filing for bankruptcy will resolve your debt problems immediately and allow you to start working on rebuilding a financial safety net.

Get on the Road to Financial Stability

Getting out of debt and building your savings are critical steps to regaining financial stability and control. Without adequate income, bankruptcy can be a tool to help you move beyond the financial difficulties and improve your financial future.


Meet Jay

Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.

I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.

I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.

I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.