What Happens To Your Credit When You File For Bankruptcy
Your payment history is the most important factor in determining your credit score, and filing bankruptcy means that you won’t be paying covered debts in full as you initially agreed.
As a result, filing bankruptcy can have a severely negative impact on your credit score. A Chapter 7 bankruptcy will remain on your credit reports and affect your credit scores for 10 years from the filing date a Chapter 13 bankruptcy will affect your credit reports and scores for seven years.
Regardless of which type of bankruptcy you choose, lenders will be able to see it on your credit reports in the public records section and it’s likely to be a factor in their decision-making. Once you’ve completed the legal process, it will show that both the bankruptcy and the debts included in it have been discharged.
If you apply for credit, lenders may not approve your application unless the bankruptcy has been discharged. Even then, you may have a hard time getting approved for certain types of loans. If you do get approved, you may face steep interest rates and other unfavorable terms.
The Chapter 13 Process
The Chapter 13 filing process generally takes 95 days from the filing of the petition to the approval of the repayment plan. But the bankruptcy wont actually be discharged until the three- to five-year plan is completed.
Heres what to expect over a typical Chapter 13 bankruptcy proceeding.
- A list of creditors and how much is owed to each
- Evidence of income
A Lenders Perspective On Chapter 13 Bankruptcy
A lender, in determining whether to extend new credit to a consumer, will review the persons credit report and credit score. If you are delinquent on multiple accounts, you will appear to be a poor credit candidate. A lender will rightfully be concerned that if you are not paying other debts, that you will also not pay this new debt. A Chapter 13 bankruptcy, on the other hand, will demonstrate to lenders that you have the ability to make payments on all debts and you are making an honest effort to do so. After the completion of a Chapter 13 bankruptcy plan lenders may also view you as less of a risk because some or all of the debt was repaid, rather than liquidated.
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When To Consider Debt Settlement Or Bankruptcy
If your monthly debt payments, excluding mortgage or rent, exceed 20% of your income, you have a debt problem that requires action. The seriousness of the problem, and your ability and determination to overcome it, will determine whether a debt settlement plan or bankruptcy is the better option.
Here are some scenarios in which debt settlement may provide the better path out of debt:
- Youre able and willing to negotiate with creditors or debt collectors on a settlement plan that you can afford and stick to.
- Your creditors will agree to greatly reduce your debt burden in exchange for your commitment to make a lump-sum payment.
- Your income is stable enough that you can continue to pay your mortgage or rent and other essential bills in addition to the payments required under a debt settlement, while still saving some money for emergency expenses.
Here are some scenarios in which bankruptcy is the better option:
Its important to remember that these are general guidelines, and anyone in serious debt who is weighing the pros and cons of debt settlement or bankruptcy is recommended to consult with a nonprofit credit counselor. Counselors from National Foundation for Credit Counseling – member agencies such as InCharge Debt Solutions can help you evaluate your current financial situation and the various debt relief options that may be available to you.
How To Boost Credit Score While In Chapter 13
A Chapter 13 Bankruptcy is a court authorized repayment plan with your creditors. You provide your best efforts over a 36 60 month time period to pay towards your debts with optimal repayment terms, such as 0% interest on unsecured debts.
This repayment process is designed to help you improve your credit throughout the course of the program and is how to boost credit score while in a Chapter 13.
Also Check: Chapter 13 Closing Process
Apply For A Loan With A Co
Should you apply for a loan on your own, lenders might deem you risky because of your credit past. Getting a co-signer on a loan can help boost your chances of getting approved. Thats because lenders will take into account the co-signers credit score, which would up your creditworthiness. When someone cosigns a loan, they dont have access to the money. However, they are on the hook for repayment should you be unable to keep up with your payments.
Why this matters: Rebuilding credit after youve filed bankruptcy can help you re-establish your credit profile. By understanding the different options, youll learn how these different forms of credit might help you boost your credit after its been on shaky ground.
How to get started: Explore the different options for establishing a new line of credit and see which ones you think might be beneficial for you. Youll want to take into consideration whether a hard pull or soft pull on your credit is required, what you would use that line of credit for, setting limits on a line of credit, and having a repayment plan in tact so you dont fall into a deeper debt hole.
Your Credit Will Take A Hit
Bankruptcy can have a more severe negative affect on your credit than mere missed payments. A Chapter 13 bankruptcy will appear on your credit reports as a derogatory mark for seven years from the date you filed the petition. The number of points your will drop will vary depending on your current scores and other factors relating to your financial situation. For more on this, check out our article on how to build credit after a bankruptcy.
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Will My Credit Score Increase After Chapter 13 Discharge
In many cases, a persons average credit score after Chapter 13 discharge increases for several reasons. Filing Chapter 13 discharges most, if not all, your unsecured debts when you complete the bankruptcy repayment plan. Therefore, the bankruptcy discharge reduces your debt to income ratio, which improves your creditworthiness.
After the filing of the Chapter 13 petition, a creditor cannot report late payments and other negative information on an account included in bankruptcy. This advantage also works to improve a credit score after bankruptcy. There are also ways to improve credit scores after Chapter 13 that you may want to consider.
Advantages And Disadvantages Of Debt Settlement
Debt settlement can be the best way out of a financial mess, but it is full of pitfalls, and the Consumer Financial Protection Bureau warns: Debt settlement may well leave you deeper in debt than you were when you started. The biggest problem is convincing a creditor, or multiple creditors, to accept less than they are owed. Creditors arent obligated to enter a settlement agreement, but many are willing if they believe you cant pay and otherwise will file for bankruptcy protection. If that happens, it means they receive little or nothing.
Some people hire a debt settlement firm to represent them, but others negotiate themselves. The advantage to contracting with a debt settlor is saving time and avoiding the hassle of negotiating yourself. But the CFPB warns: Dealing with debt settlement companies can be risky.
If you decide to pursue debt settlement on your own, it will be vitally important that you educate yourself on the details of the debt that you owe, develop a realistic plan on how much you can save each month based on your current financial situation, and negotiate with creditors or collectors with a sensible repayment plan that they will agree to in writing.
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How To Improve My Credit Score After Chapter 13 Bankruptcy
Once you receive your Chapter 13 bankruptcy discharge, these steps can help you improve your credit score after bankruptcy:
- Obtain a free copy of your credit report for all three credit reporting agencies. Check each report for inaccuracies and report errors immediately. All accounts included in the bankruptcy should have a zero balance.
- Follow up with reports of errors to ensure they are corrected.
- Check your credit reports annually for errors or mistakes.
- Always pay debt payments before the due dates.
- Make sure creditors report collection accounts included in the bankruptcy as discharged on the credit report.
- Use a monthly budget to keep finances under control and avoid overspending in the future.
- Establish an emergency savings fund to avoid the need for credit in the future.
- Borrow money only when you are sure you can repay the debt. When you are ready, start with a small credit card and then mix in other types of loans, such as an installment loan and consumer loans.
- Never over-extend yourself because that can hurt your credit rating.
- Utilize the information you learned in your bankruptcy courses to help you manage your money and debts wisely.
You may also be interested to read how to remove a bankruptcy from your credit report. Experian provides an excellent resources on the subject.
How Do Bankruptcies Affect Your Credit Score
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Editors note: This post has been updated with new information.
Before starting on a pursuit to accumulate points and miles, its important to understand how your credit score is calculated and mistakes you should be careful to avoid. Your credit report follows you around for a long time, and you should only consider opening credit cards if youre able to manage them responsibly.
With every credit card Ive opened, Ive become even more attentive to paying my bills on time and monitoring my accounts for fraud. However, its possible that before you found the world of points and miles, you may have made some mistakes such as missed payments, carried a balance, or even had to declare bankruptcy. Today, were going to take a look at how bankruptcy affects your credit score and what you can do about it.
The contents of this post are not meant to represent legal or financial advice, and you should consult with a lawyer and/or financial professional before making decisions regarding a bankruptcy filing.
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Getting New Credit After Bankruptcy
Assuming that you successfully complete a repayment plan under Chapter 13, you will get a discharge that will show that debts covered by the bankruptcy have been removed. You should be able to get new credit at this point, although you should make sure to keep up with payments and avoid accumulating too much debt too fast. Lenders may charge more interest when you have a Chapter 13 bankruptcy on your record, but interest rates will go down as you show that you can handle the debt responsibly. Over time, your credit score will improve as well.
After you complete your bankruptcy, you should get copies of your credit report from each of the major bureaus. This will allow you to verify that the record reflects a discharge rather than a dismissal of your bankruptcy. Also, you should make sure that all of the debts that were included in the Chapter 13 proceeding are marked as having been included. Any errors or omissions may cause a lender to incorrectly conclude that you have not paid off the debt.
A Chapter 13 bankruptcy case will appear on your credit report for seven years after you file. Since the case lasts for three to five years, it will appear for two to four years after the discharge. By contrast, a Chapter 7 bankruptcy case will appear for 10 years. This is a potential reason to choose Chapter 13 over Chapter 7.
Contact An Experienced North Carolina Bankruptcy Attorney
If you are dealing with overwhelming debt, schedule a free consultation today with our compassionate consumer bankruptcy attorneys to discuss your options. At Sasser Law, youll work directly with a board-certified bankruptcy attorney. We pride ourselves on giving straightforward and honest legal advice.
The Sasser Law Firm serves individuals and businesses throughout North Carolina, including in Wake, Harnett, Johnston, Durham, Orange, Granville, Vance, Franklin, Warren, Nash, Lee, Chatham, and Moore counties.
This post was originally published in October 2019 and has been updated for accuracy and comprehensiveness in August 2021.
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Will Bankruptcy Lower My Credit Score
Yes. Bankruptcy will lower your credit score. But, the amount by which it lowers will depend on your credit score before filing for bankruptcy. If you already had a low credit score, filing for bankruptcy will most likely not cause a major change. On the other hand, if you had a high credit score, filing for bankruptcy may cause a significant change.
Rebuild Your Credit After Chapter 13 Bankruptcy
Even though a Chapter 13 bankruptcy can last up to 5 years, you actually can begin rebuilding your credit immediately after you Chapter 13 Plan is confirmed by the Bankruptcy Court. Contrary to popular belief, you can actually obtain new credit while in an active Chapter 13 bankruptcy. Weve actually had clients get a mortgage during a Chapter 13!
After the Bankruptcy Court confirms your Chapter 13 Plan, we will automatically enroll you in the 7 Steps to a 720 Credit Score Program. Even though you may still be in an active Chapter 13 bankruptcy, you will be on your way to rebuilding credit score!
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Apply For A New Line Of Credit
Adding a new line of credit can demonstrate that you can responsibly make on-time payments. In turn, itll help your credit score. However, when you apply for new lines of credit, the lender will do a hard pull on your credit. Every time you apply for new credit, your prospective lender accesses your credit report, says April Parks-Lewis, director of education and corporate communications at Consolidated Credit. Those inquiries can drag down your credit score.
As too many hard inquiries will ding your credit score, try to apply for credit lines you know you can qualify for. You can also apply to get prequalified, which results in a soft pull of your credit. When youre trying to build your credit after bankruptcy, here are some types of credit for you to consider:
Why this matters: A new line of credit can help you build your creditworthiness.
How to get started: Choose one of the options from above that fits your situation best and work on keeping that line of credit in good condition.
How Accounts Appear On Your Credit Reports
Before filing for bankruptcy, you probably had bills you struggled to keep up with credit cards, medical debt and more.
When you include those accounts in a bankruptcy filing, theyll still be reported on your credit reports. Accounts discharged in bankruptcy can be reported as discharged or included in bankruptcy with a zero balance. Even though you owe $0 for them, theyll still appear on your reports. If you apply for credit, lenders may see this note when they check your reports, and they may deny your application.
But heres that good news we promised: Accounts included in a bankruptcy filing wont be reported as unpaid or past due anymore, and you may feel relief without those financial burdens.
Your credit scores will eventually start rebounding with those positive effects, Huynh says. Thats assuming, of course, you use credit responsibly from here on out.
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How Long Does It Take To Rebuild Credit After Chapter 13
Chern also says that most Chapter 13 petitioners will see a reduction in debt-to-income ratio, but this wont occur as quickly.
After three to five years of living on a strict budget, Chapter 13 debtors should be much more equipped to manage their money efficiently, he says. In many cases, after 18 months of regular Chapter 13 payments, a debtor can refinance out of a Chapter 13, especially if the debtor has any equity in a home.
How To Build Credit After Bankruptcy
You can start rebuilding your credit score after the bankruptcy stay stops creditors from taking action. Bankruptcy will show on your record for 7-10 years, but every year you work to improve your credit, the less it will affect you and the financing you seek.
You need to wait 30 days after you receive the final discharge. This means most of your accounts will be at a zero balance, and creditors must stop calling you about debts.
To rebuild your credit score, you should:
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