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Consumer bankruptcy myths may harm struggling debtors

Prior posts on this New York bankruptcy law blog have discussed the struggles that many debtors experience when confronted with the decision of whether to file for consumer bankruptcy. Some fear that if they file for bankruptcy they will never be able to access credit again. Others worry that their credit scores will be so negatively impacted that their financial lives will never recover.

According to a recent report released by the Federal Reserve Bank of New York, those personal bankruptcy myths may be unfounded. The report investigated the financial health of debtors who filed for bankruptcy as well as those who chose to use other methods of debt relief. The results of the report are somewhat surprising.

When comparing bankruptcy filers and non-bankruptcy filers, the bankruptcy filers accessed more new credit than their non-filing counterparts. The report noted that while bankruptcy may initially reduce credit options for debtors, once their debts are discharged their credit opportunities rise.

Similarly, the report found that people who file for bankruptcy see their credit scores go up after discharging their debts, whereas debtors who struggle in insolvency without filing for bankruptcy generally maintain lower scores. Bankruptcy therefore seems to help a debtor's credit recover when it is responsibly filed and managed.

Finally, the report claimed that debtors who do not file for individual bankruptcy tend to feel more stress about their money than those who opt for bankruptcy protections. In the end, individuals must look at their own financial lives to decide if the going through the bankruptcy process is the right decision for them.

Source: Fox Business, "How Avoiding Bankruptcy Can Backfire," Steve Rhode, March 2, 2015

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