Chapter 13 and Your Credit Report: What You Need to Know

Bankruptcy provides relief to those who can’t afford to pay their debts as they come due. Oftentimes folks filing bankruptcy have fallen behind on their debt payments and their credit score has already taken the hit. But, that’s not always the case and this is especially true for folks filing Chapter 13 to reorganize their debt, rather than eliminate it completely through Chapter 7 bankruptcy. This article will explore the effect of Chapter 13 bankruptcy on your credit report and credit score.

Bankruptcy and Your Credit Report - The Basics

Filing bankruptcy to get out of credit card debt can be a difficult decision. If you are reading this, you may be wondering how your credit report will be impacted by your bankruptcy filing. Many individuals considering bankruptcy are under a misguided impression that when they file bankruptcy, their credit scores are ruined forever. Simply put, this is not true. Bankruptcy laws were created to provide people who fell into unfortunate financial circumstances, a way to start over. If filing bankruptcy ruined your credit score forever, this would defeat the whole purpose of bankruptcy. Some filers see their credit score increase immediately after their bankruptcy is filed because they no longer have any debt. Keep in mind, there is no guarantee your credit score will rise, every individual's financial circumstances are different and what you do (or don’t do) to rebuild your credit will be critical.

How your credit score or FICO score is impacted will depend on how your credit score was before you filed for bankruptcy. Does your credit report have a lot of negative information? Did you make your credit card payments on time? Did you fall behind on student loan payments? Do you have a lot of secured credit card bills, unsecured loans, or secured loans? Do you have charge offs? Are there judgments on your credit report? These are some of the factors that the three major credit bureaus (Equifax, Transunion, and Experian) use to calculate your score. When you file bankruptcy, it gets reported to the credit bureaus. If you had good credit before you filed bankruptcy, you may see a slight decrease as a result. For most individuals contemplating bankruptcy, their credit score isn’t very good by the time they file their case. How long your bankruptcy filing will impact your credit score will depend on how low your credit score was before you filed and how good you are at rebuilding your credit.

In a Chapter 7 bankruptcy, your debts are discharged about four months after filing your case, so rebuilding your credit can begin right away. Chapter 13, however, is a 3-5 year process, Thus, in Chapter 13 it can take longer to begin rebuilding your credit score. For most, the rebuilding process won’t start until a few years after the case is filed. But if you are worried that lenders will never extend new credit to you again, you can rest assured, they will!

 A Quick Primer on Chapter 13 Bankruptcy

Chapter 13, also known as a wage earner’s plan, allows people with an income to repay all or a portion of their debts. In Chapter 13, individuals above the median income must be on a five-year repayment plan. If you are below the median income you will only be required to pay into a 3-year plan. As you make monthly payments a Chapter 13 trustee will distribute the payments to your creditors based on the terms of the plan. While in Chapter 13, you won’t be able to incur more debt without getting prior approval from the court.

How Long Does Chapter 13 Bankruptcy Stay On My Credit Report?

Individuals are often deterred from filing bankruptcy once they hear that a bankruptcy filing stays on a credit report for up to ten years. This ten-year rule only applies to individuals filing a Chapter 7 bankruptcy. Completed Chapter 13 cases, on the other hand, are removed from your credit by all three major credit reporting agencies 7 years after filing your bankruptcy case. Thus, if you enter into a five year Chapter 13 repayment plan, you will only have to wait two more years for the bankruptcy to be removed once done.

Instead of walking around with bad credit for the next few years Chapter 13 can help you rebuild your credit soon after your repayment plan is completed. Many debt management plans that offer credit repair will tell people not to file bankruptcy because it will ruin your credit. However, Chapter 13 may repair your credit sooner than any debt consolidation or debt settlement plan. When individuals file bankruptcy they can begin paying back their debts and fixing their credit. However, most debt management plans can take eight years for credit repair. Moreover, one late payment can stay on your credit report for up to six years. So, if you keep falling behind on payments throughout the years you may find your credit score decreasing.

Why is Chapter 13 Removed Sooner?

Unlike a Chapter 7, which stays on your credit report for ten years, a Chapter 13 bankruptcy is removed from your credit report sooner as a reward for paying back some or all of your debts through your Chapter 13 case.

How Do Creditors And Others View a Chapter 13 Bankruptcy Wersus a Chapter 7 Bankruptcy On My Credit Report

Most individuals look at Chapter 13, as the “better” bankruptcy process for their credit report. People think by paying back their debts in Chapter 13, it will allow their creditors to see that they are making good-faith payments on their debt which creditors will like that better. While that may be true, being in a Chapter 13 repayment plan also shows creditors that you can maintain a budget and make regular payments to creditors. All types of bankruptcy may leave negative information on your credit report however, most negative impacts are usually minor. In a Chapter 7 bankruptcy, your debts are wiped away, creditors realize that you have no debt and are likely to extend credit. Some lenders will view you as less of a risk and be willing to extend credit to you rather than someone who has other debts. Creditors also know that individuals who file Chapter 7 bankruptcy, can’t file Chapter 7 again for another eight years. So, creditors may be more likely to extend credit to you because you are less of a risk than someone who can decide tomorrow they want to file bankruptcy. Either way, once you get your discharge in a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, you will get credit again and be able to increase your score.

Lenders will look at your credit histories such as on-time payments and debt to income ratio to determine if they should extend credit to you. Filing a Chapter 7 or a Chapter 13 bankruptcy allows you to rebuild your credit and take on new debt responsibly in the future.

 Conclusion

Chapter 13, is a great tool that allows you to not only protect yourself from creditors and get debt relief for debts that you can’t pay back, but it also will train you to be better at financial management. Being in a Chapter 13 bankruptcy teaches you how to budget, make payments on time, and live off the money you make. To get your credit back up, you will need to practice good credit rebuilding tips and be proactive on ways to increase your credit score. If you are worried that the bankruptcy filing will stay on your credit report for another two years after you receive your discharge, don't be! Bankruptcy stays on your public record, creditors will see that the filing date of your bankruptcy petition was five years ago, so it shouldn’t negatively impact you.

If you want to learn more about filing a Chapter 13 and how it impacts your credit score, you should speak with a bankruptcy attorney who can review your personal finances and guide you through the Chapter 13 process. A bankruptcy lawyer can provide insight on ways to build credit after a bankruptcy is filed.