Why is Bankruptcy Better for Your Credit Score than “Debt Consolidation”

“Now I can’t even rent an apartment.”

Sam, not his real name, talked to us last month about filing for bankruptcy. He’d been trying to “resolve” his debts through one of the newer debt settlement outfits.

He had been paying the Debt Consolidation Company for eighteen months, and his credit score declined. Why was that?

Why Debt Settlement/Debt Consolidation Wrecks Your Credit

The big idea behind these companies is that you stop paying your debts:  Making your creditors wait for payment encourages them to give you a better deal, in theory. Of course, every month you don’t pay, the creditors ding your credit with another delinquency.  And when you settle–if you do–with the first one or two creditors, the others still aren’t getting paid. They keep reporting you as late and dragging your credit score down further.

In credit reporting vocabulary, each month you are late is reported as a delinquency, and the delinquencies just pile up.

Bankruptcy Stops Credit Report Delinquencies

When you file for bankruptcy, your creditors have to stop credit reporting. That means you do NOT get hit with a new late report delinquency every month. Your credit takes one last hit, and that’s it. You can start the process of rebuilding your credit. That’s why studies show that most people experience an immediate improvement in their credit scores after filing for bankruptcy.

As soon as the bankruptcy is over–usually three and a half months in a Chapter 7–you can get new credit cards and start building good credit, while your former problems fade into the past.  In a debt settlement situation, those late payments keep chasing you.

Your credit can be as good as new in a few years after bankruptcy.