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

“Now I can’t even rent an apartment”
Chuck, not his real name, talked to me last month about filing bankruptcy. He’d been trying to “resolve” his debts through one of the newer debt settlement outfits, Five Lakes.  
After 18 months in a debt settlement program, Chuck can’t even rent an apartment.
He had been paying Five Lakes for eighteen months and his credit score kept going down. Why was that?
Why Debt Settlement/Debt Consolidation Wrecks Your Credit
The big idea behind Five Lakes and others 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 reach a settlement–if you do–with the first one or two creditors, the others still aren’t getting paid. They still keep reporting you as late and keep dragging your credit score down further.
Each month you are late is reported as a delinquency in credit reporting vocabulary. And the delinquencies just pile up.
Bankruptcy Stops Credit Report Delinquencies
When you file bankruptcy, your creditors have to stop credit-reporting.  That means you do NOT get his 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, most people experience an immediate improvement to their credit scores after filing 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 payment keep chasing you.
In a few years after bankruptcy, your credit can be good as new.
 
 
 
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