Thousands of people file for bankruptcy in Ohio and around the country every year, but countless others choose instead to endure unmanageable financial situations. There are several myths and misconceptions surrounding bankruptcy, which is why people who would benefit from filing a Chapter 7 or Chapter 13 petition often decide not to do so. One of the most pervasive misconceptions about bankruptcy is the impact that seeking debt relief has on credit scores. Many people believe that filing a bankruptcy will make borrowing in the future virtually impossible, but that is just not true.
Filing for bankruptcy is actually a good way to begin rebuilding credit. This is because most people already have several late payments when they file Chapter 7 or Chapter 13 petitions, which means their credit scores are already low. Chapter 7 bankruptcies generally discharge credit card bills, medical debts and installment loans, which reduces the amount of remaining debt and improves debt-to-income ratios. The average credit score of the people who filed Chapter 7 bankruptcies in 2020 was 538.2 according to a study published by the Federal Reserve Bank of Philadelphia. By the time their cases were discharged, which usually took about six months, that figure had risen to 620.3.
The Bankruptcy Code was written to give Americans who are struggling financially the chance to start again, but many people choose continuing hardship because they believe they have a moral obligation to pay back the money they borrowed. This may be laudable, but it is usually futile. Credit cards take decades to pay off when only minimum payments are made, and late payments, penalties and fees can make escaping debt almost impossible. Lenders often use predatory tactics to lure people into debt, and then they rely on bankruptcy myths and misconceptions to keep them trapped.
Attorneys with debt relief experience could dispel these myths and go over the differences between bankruptcy and other forms of debt relief, and they could also explain that filing a Chapter 7 or Chapter 13 petition puts an end to daily harassment from bill collectors. This is because bankruptcy judges issue a court order called an automatic stay when petitions are filed, which orders creditors to cease all collection efforts and puts a stop to debt-related wage garnishments and lawsuits.