One question people often have about bankruptcy is how it will affect their credit scores. In a recent article (link), Paul Goldsmith-Pinkham, an economist with the Federal Reserve Bank of New York’s Research and Statistics Group, shows that credit scores and credit limits actually go up after bankruptcy. Source: Paul Goldsmith-Pinkham, “Do Credit Markets Watch the Waving Flag of Bankruptcy?” Federal Reserve Bank of New York Liberty Street Economics (blog), May 15, 2017, http://libertystreeteconomics.newyorkfed.org/2017/05/do-credit-markets-watch-the-waving-flag-of-bankruptcy.html. Goldsmith-Pinkham used a database based on consumer credit reports. When a person files for bankruptcy, a “flag” is marked on the person’s credit report. Using this flag, Goldsmith-Pinkham tracked credit history for people in the database before and after bankruptcy. Goldsmith-Pinkham found that credit scores were at their lowest just before a bankruptcy filing (which takes place at the “0” mark on the graph above). Once the bankruptcy was filed, credit scores rose significantly. Scores continued to rise over time, with another noticeable increase when the bankruptcy “flag” was removed from the credit report (10 years for chapter 7 cases; 7 years for successful chapter 13 cases). Goldsmith-Pinkham also found that credit limits increased after a bankruptcy filing, especially around the time that the “flag” is removed from the credit report. It is important to remember that these findings are based on general analysis of one set of data. The results will not necessarily hold true for every person’s situation. But as a whole, it appears that a bankruptcy filing is a step along the way to repairing credit, rather than a cause of poor credit. Posted by Jeffrey Paulsen.