Will Filing for Chapter 13 Bankruptcy Ruin My Credit Score?
Will Filing for Chapter Bankruptcy 13 Ruin My Credit Score?
When you decide to file bankruptcy, it will be reflected on your credit report for years to come. As such, there is really no way around the brutal truth that filing will have a negative effect on your rating. If you are able to afford a repayment plan, choosing to file under Chapter 13 bankruptcy may help you recover more quickly and save your financial reputation.
Why Creditors Prefer Chapter 13 Instead of Chapter 7
It’s no secret that lenders prefer Chapter 13 filing to that of Chapter 7 bankruptcy, but why exactly is this? It basically boils down to the fact that with Chapter 13, your creditors have some hope of future payment. In contrast, when you file under Chapter 7 bankruptcy, if you qualify, their chances of receiving any payment is dim.
Your Credit Score Under Chapter 7 Bankruptcy
Under Chapter 7, unsecured debts, such as medical bills and credit card companies, don’t usually receive any kind of payment. This is because Chapter 7 doesn’t require you to make payments to creditors or set up any kind of payment process. Instead, any owned property that cannot be protected under your state’s exemption laws must be turned over to a trustee that is assigned by the court. Your trustee then sells the property for whatever they can get for it and uses the proceeds from the sale to pay off your creditors. However, most filers are able to exempt the majority, if not all, of their assets, thus keeping them out of the reach of the court. This means there is often nothing left to pay off the creditors.
In contrast, when you file under Chapter 13, you are required to set up a payment plan in which you will make scheduled payments to the court over the course of the next few years. The trustee then distributes the funds to your creditors that have filed valid proof of claims. However, not all Chapter 13 plans pay off unsecured cards. The Chapter 13 zero percent plan, for example, does not require this. Regardless, Chapter 13 filing offers at least some hope to lenders that they might still receive payment. Future creditors tend to see this as more desirable than a Chapter 7 filing.
Your Credit Score Under Chapter 13 Bankruptcy
If you have been thinking about filing bankruptcy, chances are, you have been juggling your finances for some time now. In all likelihood, this has had a negative effect on your rating. If you already have a bad rating, it’s unlikely a bankruptcy case will lower your overall score by much. However, if you have maintained a reasonable or high credit rating, filing will have a much greater impact on it.
For example, if you have been struggling with your credit for awhile, and your rating has fallen to 550 or below, it isn’t likely to plummet much. However, if you carry a higher score, such as 650 or more, it will likely drop 100 points or more. You would easily go from having a high or fair rating to a poor one.
While creditors would prefer you file under Chapter 13, whether you choose to file under Chapter 7 or 13 will make little to no difference regarding your rating. It’s impossible to know exactly the effect on your score since companies that determine them keep their formulas a secret. However, deciding to file under Chapter 13 instead of Chapter 7 doesn’t appear to have much affect on on your rating.
Getting Credit After Filing Bankruptcy
While you are in a Chapter 13 case, you are usually not allowed to take on any further financial obligations. This can be a challenge, especially if a household appliance breaks down or a medical emergency arises during this time.
The courts understand that issues and emergencies arise in life that can set you back from making your payments. They recognize that additional credit can make a big the difference in emergency situations. Should you absolutely need to take on further credit, your attorney can assist you in locating a lender that is willing to work with you. Your lawyer will also need to file a motion with the court seeking permission to take on this new obligation.
Once your case has ended and you have received your notice of discharge from the court, locating lenders is not impossible. A Chapter 13 filing on your report is not an automatic red flag to lenders. As long as you are able and willing to pay a large interest rate for the first few years, you can find lenders who want to help you get back on your feet and re-establish your rating. As long as you handle your new credit responsibly, don’t take on more payments than you can handle, and make all of your payments on time, your interest rates and score will steadily improve.
Confirm the Information and Accuracy of Your Credit Report
It’s always a good idea to keep tabs on your score with the major bureau reports. Make certain the reports reflect a discharge instead of a dismissal. Look over your reports carefully and check to ensure each of your prior debts display “included in bankruptcy,” If it does not show this, lenders may assume these obligations still remain unpaid. This can have a major impact when it comes to your creditworthiness.
While filing under Credit 13 may not directly help your score, it can help you get back on the road to financial recovery at a faster rate than if you choose to file under Chapter 7. For the most part, negative information is reflected on your report for as many as seven years. While a Chapter 13 case can also stay on your report for a total of seven years, the time starts ticking down from the date the case is filed. Depending on how long your plan is, the Chapter 13 notation should disappear from your reports approximately two to four years after your case has been discharged. In contrast, a Chapter 7 can remain on your reports for up to ten years.
For more information on your credit and how it might be affected by Chapter 7 or Chapter 13 bankruptcy, contact The Law Offices of Adam C. Gomerman today. Adam Gomerman has close to 30 years experience navigating the Federal Bankruptcy Courts and can advise you on the best path forward.