Filing Chapter 13 provides debt relief by reorganizing your debt into a court-supervised repayment plan. Chapter 13 offers many benefits, including avowing foreclosures and repossessions. A chapter 13 bankruptcy can also protect your assets while you get out of debt. Some people can also boost credit scores while in Chapter 13.
Before we discuss ways to boost credit scores in Chapter 13, it helps to understand how filing for bankruptcy affects credit scores.
Many people fear they will never have a good credit score again if they file Chapter 13. The fact is that filing for bankruptcy can help you improve your credit score faster than ignoring debt problems.
Chapter 13 bankruptcies stay on your credit report for seven years. So while it is true that filing bankruptcy can lower your credit score, the drop in your credit rating is temporary. Additionally, the amount your credit score drops after filing Chapter 13 depends on several factors.
Most people who file for bankruptcy relief have negative information on their credit reports. They might have been struggling with debt problems for months or years. During that time, they are likely to:
People might also have judgments because of debt collection lawsuits. Negative information lowers your credit score.
When you file Chapter 13, that information is also reported to the credit bureaus. The bankruptcy filing is considered negative information that can lower your credit score. However, if your credit rating is poor because of other negative information, the bankruptcy filing might not significantly impact your credit score.
On the other hand, if you have a good credit score, filing for bankruptcy relief could lower your credit score significantly. However, it is important to remember the drop in your credit rating is temporary.
When you file for bankruptcy relief, your unsecured debts are discharged. A bankruptcy discharge releases you from the legal obligation to repay a debt. When you complete your Chapter 13 plan, discharged debts have a zero balance. Therefore, your debt-to-income rations decreases, which improves your credit score.
You can rebuild credit scores after bankruptcy. In many cases, you can boost credit scores while in Chapter 13. Are you curious about a Chapter 13 case? You can use our free Chapter 13 calculator below to estimate a Chapter 13 repayment plan.
During your Chapter 13 repayment plan, you could see your credit score increase as you make regular monthly payments to the Chapter 13 trustee. When the Chapter 13 trustee begins to pay your unsecured creditors, the balances on the accounts decrease. Therefore, your debt-to-income ratio decreases. The amount you owe accounts for 30% of your FICO credit score. As the balances decrease, your credit score improves.
Payment history accounts for 35% of your credit score. Therefore, late payments significantly decrease your credit rating. The automatic bankruptcy stay prevents creditors from collecting debts while you are in bankruptcy. However, it also prevents creditors from reporting late payments to the credit bureaus. Therefore, your payment history should improve as the Chapter 13 trustee makes timely payments.
A Chapter 13 bankruptcy case takes three to five years to complete. You might not want to wait that long to begin working to improve your credit score. The good news is that you can take steps during the Chapter 13 case to boost credit scores.
A Chapter 13 plan typically includes the arrearage (back payments) owed to secured creditors. Secured creditors have a lien on collateral, such as a mortgage or car loan. While most car loans are included in the Chapter 13 plan, your mortgage payments will resume outside the plan. In other words, you must pay your mortgage payment directly to the lender each month. Make sure to pay all payments on time to improve your payment history.
Proving that you can manage credit wisely is important for boosting credit scores. Obtaining a new line of credit and making payments on time can improve your credit score. However, there is a balancing act with your debt-to-income ratio. You do not want to lower your credit score by increasing your debt-to-income ratio.
Furthermore, you likely require court approval before obtaining new credit during a Chapter 13 payment. The guidelines for obtaining approval from the court vary depending on local court rules. Always talk with your Chapter 13 bankruptcy lawyer before applying for new credit during Chapter 13.
Obtain free copies of your credit reports from all three credit bureaus. Check your report for mistakes or errors. Dispute errors on credit reports that lower your credit score. Incorrect information could be a reason for a poor credit score.
Secured credit cards require a deposit equal to the maximum credit limit. The deposit ensures the account is paid even if you default on the payments. Before applying for a secured credit card, talk with your Chapter 13 bankruptcy attorney. The secured credit card may be viewed as new credit, which is not permitted without court approval.
If your attorney says you can apply for a secured credit card, ask the company if it reports payments to credit bureaus. The only way the secured credit card helps you is if you make on-time payments AND the company reports your on-time payments to the credit bureau.
If you are unsure whether filing Chapter 13 is your best option to resolve debt problems, Ascend can help. Our free debt relief calculator helps you compare debt relief options to determine the best way to get out of debt. Depending on your specific financial situation, debt settlement, debt management, or debt payoff planning might be a better alternative to filing a bankruptcy petition.
If you have debts you cannot pay, call or text us at (833) 272-3631 or contact us online for a free case evaluation.