Many people who are overwhelmed by debt and are considering bankruptcy are very hesitant to file because of the effect it will have on their credit. While it's true that bankruptcy does affect the credit of the person filing, the effects may not be as harsh as one might believe. Bankruptcy stays on the debtor's credit report for 7-10 years, but during that time he or she can begin building positive payment patterns, which lead to positive credit scores.
One of the most important factors that lenders use in deciding whether or not to extend credit to a consumer is the ratio of a person's income compared to their debts. After bankruptcy, most if not all debts are erased, drastically improving the consumer's debt to income ratio, which is an important factor for financial institutions when managing the risk associated with the granting of credit. What this means is that once the consumer files bankruptcy, regardless of whether they attempt the process on their own or they decide to go the expert route and hire a bankruptcy attorney, they are moving in the right direction toward making them self "lend worthy" in the bank's eyes.
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This is because the loan underwriter that is in charge of the approve/decline decision is weighing certain risks, they are trying to determine whether or not the bank is likely to lose money on the loan. If the consumer's debt to income ratio is low, the underwriter knows that the consumer has the ability to pay the loan back on the scheduled terms. At the most, they will ask for some sort of collateral to further minimize the bank's risk. So given these two factors: a consumer with a low debt to income ratio and one who can provide some sort of collateral to back the loan, we've got a prime candidate for a loan or line of credit, bankruptcy or not.
Also, lenders make the majority of their money from the interest they apply to the loan. They know that once a person completes a Chapter 7 discharge, they can not file bankruptcy again for at least six years, and they know six years of interest payments will be profitable. There are even lenders who specialize in giving credit to people post-bankruptcy. So although one's credit is negatively affected by bankruptcy, obtaining lines of credit and maintaining on-time payments is the key to the rebuilding of a credit score and is not out of reach of consumers even after a bankruptcy.
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