03/05/2015 06:08 pm ET Updated May 05, 2015

The Fresh Start of a Bankruptcy May Restore Credit Faster

People consider filing bankruptcy when the alternative has become worse. Figuring out if you are at that point though can be difficult. One misconception that makes people hesitate to file bankruptcy is the impact on their credit. An in depth study by the Federal Reserve Bank comparing the credit of people who've filed bankruptcy with those suffering through chronic defaults confirmed what many bankruptcy attorneys already know:

Insolvency is associated with worse financial outcomes than bankruptcy, as individuals in this state accumulate collections, judgements, do not have access to new lines of credit, and their credit score bottoms out.

This research found the credit scores of people who've filed bankruptcy are substantially better than those still dealing with chronic defaults.

Filing bankruptcy is never an easy decision. I tell people to look two years down the road to compare where they'll be without a bankruptcy to see if that alternative is palatable. If nothing has changed except you are further in default, it makes sense to consider a bankruptcy rather than endure the slow motion slide from collection calls to lawsuits.

How do you tell if you are at the point where considering a bankruptcy might make sense?

  • If you're considering liquidating a 401k or pension -- I always feel bad for people who see me for a bankruptcy who have already done this because their creditors could not have touched a dime of their pension.
  • If you're juggling payments because you can't afford to pay everything -- this is probably the number one factor people mention in making a bankruptcy appointment.
  • If you're putting food or gas on the cards to be able to afford the payments -- people do this hoping to get that new job, but this just builds a 'house of cards' destined to collapse of its own weight. It can also create issues in a bankruptcy.
  • If you're trying to do a loan modification and can only afford your credit card payments because the loan mod application permits you stop paying your mortgage. I can't think of any cases where preferring credit card payments over home mortgage payments made sense.

Bankruptcy stays on your credit for 10 years but won't prevent you from getting credit for that long. I have had clients get mortgages at good interest rates within a couple of years of filing bankruptcy. Filing bankruptcy is not for everyone but making a hard decision can avoid prolonging your misery.

The above is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a consumer bankruptcy and student loan attorney admitted to practice in New Hampshire (NH) and Massachusetts (Ma) and may be reached through his website at, by email at, or by calling 603-893-4300.

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