This week, the Federal Reserve Bank of New York Published on its website the report “Insolvency after the 2005 Bankruptcy Reform”. This report confirmed what many of us in the field had known for a long time: people in financial distress who file bankruptcy recover their credit much faster than people who do not. Specifically, the authors stated:
“The individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy, whereas the recovery in credit score is much lower for individuals who do not go bankrupt. ”
The report concluded that:
“insolvent individuals who do not go bankrupt exhibit more financial stress than those who do, suggesting that these individuals would likely prefer to file for bankruptcy if they could afford it. ”
The problem of affordability is mostly a problem of creativity. It is because of the obvious difficulty people in financial distress have in affording bankruptcy that I have always been so flexible about attorney payment plans. It is also why I have been so aggressive about urging people to use their tax refunds to help finance a bankruptcy filing. For example, I recently ran this offer involving taxes and bankruptcy.
The important thing to keep in mind is that bankruptcy is a bargain by every measure. The banks, especially the Wall Street banks, have done a good job of spreading their propaganda that bankruptcy destroys people’s credit, or that your credit will not recover from a bankruptcy filing. The opposite is true. It is much easier to recover your credit after a bankruptcy filing, than it is to recover your credit when you are in a financial mess. It is extraordinary that the New York Fed would publish a report conclusively proving that the best way for people in financial difficulty to recover their credit is to file bankruptcy.
As anecdotal proof of this fact, I had a former bankruptcy client of mine see me today to file her taxes. She is now a homeowner. She was not when I did her bankruptcy. I asked her if the bankruptcy caused her any difficulty in getting her mortgage. She told me that it did not. I doubt she would ever have been in a position to purchase a home had she not have filed bankruptcy.