What’s Worse; Bankruptcy or Trying to Wait Out My Creditors?

Question:

I am considering filing chapter 7 bankruptcy. My credit is already bad (526), is it worse to have a bankruptcy or charge offs and collections on my credit report? At this point Discover and American Express put a charge off against my credit; will a chapter 7 banrkuptcy stop this?

Answer:

Bankruptcy actually helps people in your circumstances rebuild their credit. I know; that statement sounds self serving and goes against popular myth. The main reason bankruptcy helps, and not hurts, is that being in default on your creditors has an ongoing, and continuing negative effect on your credit: continued missed payments, new collection accounts, etc. Bankruptcy puts a stop to all that. Bankruptcy provides a clean slate from which to start rebuilding credit. Oft times, if the client has a sub 550 credit score, we will see the credit score increase after filing bankruptcy.

In addition to the credit aspect of being in default, you must contend with collection activity and risks associated with not being able to pay your bills. If you go long enough not paying, eventually one of your creditors will sue you in an effort to use the court’s power to collect against you, e.g. wage garnishment, bank account levy, etc.

The wait it out strategy never works. Aside from the risk of lawsuits and aggressive collection, your credit never really recovers until you take steps to resolve the underlying debt. With bankruptcy, most people can rebuild their credit in as little as 2 years.