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How Does Chapter 13 Affect Your Credit?

You may be considering bankruptcy after a recent financial hardship and wondering how a Chapter 13 bankruptcy will affect your credit. Fear of a bad credit score keeps many people from considering Chapter 13 as a way to get out of debt. Unfortunately, by the time many people consider bankruptcy as a debt-relief option, their credit score has already been harmed because of late payments, debt collections, and other adverse credit actions. However, how does Chapter 13 affect your credit? 

For many individuals, filing Chapter 13 might be the best way to stop additional harm to their credit rating. Additionally, filing a Chapter 13 bankruptcy case may also help boost credit scores quicker than you might believe.

What is a FICO Credit Score?

Knowing what happens to your credit when you file a bankruptcy petition can help debunk some bankruptcy mysteries that keep people from filing Chapter 13. Credit scores range from 300 to 850, with 300 being the worst credit score. Higher credit scores allow people to obtain credit easier and at lower interest rates and better terms.

Your FICO credit score is calculated based on five data groups:

  • Payment history makes up thirty-five percent of your score;
  • Thirty percent of your credit score is the amounts you owe;
  • The length you have had credit accounts for fifteen percent of a credit score;
  • Ten percent of your credit score is the mix of credit you owe; and,
  • Ten percent of a credit score is new credit applications. 

Additionally, negative information, such as debt collections, judgments, and bankruptcies tend to lower credit scores. However, credit scores are constantly changing. 

New information filed with the credit reporting agencies can cause your credit score to go up or down. The change in your credit score after filing Chapter 13 depends on numerous factors specific to your financial situation. Don’t judge how filing Chapter 13 will affect your credit score based on another person’s experience. 

How Many Points Do I Lose on My Credit Report When I File Chapter 13 Bankruptcy?

The average drop in credit score after filing Chapter 13 depends on what your credit score was before filing bankruptcy. 

Typically, individuals with higher credit scores who file Chapter 13 experience a larger drop in their credit scores compared to individuals who have good to poor credit ratings when they file their bankruptcy petition. Some sources estimate claim that a credit score can drop as much as 200 points if you have excellent credit when you file for bankruptcy relief. However, if you have poor credit, you may only see a 100 point or less drop in your score if you file Chapter 13.

The good news is that your Chapter 13 bankruptcy case remains on your credit report for only seven years (Chapter 7 cases remain on credit reports for ten years). However, you can take some steps to improve your credit score during your Chapter 13 case. 

Another piece of good news is that many debtors experience an increase in their credit score within a year or two after filing for bankruptcy relief, which helps them on their roads to financial recovery. 

How to Boost Credit Score While in Chapter 13 Bankruptcy?

How does Chapter 13 affect your credit during the Chapter 13 case?

You must obtain court approval during your Chapter 13 plan to incur new debt. However, many debtors in Chapter 13 continue to pay their mortgage payments and a few other payments outside of their bankruptcy plan. 

What is one of the best ways to boost a credit score while in Chapter 13? To pay mortgage payments and other debt payments before their due dates. Payment history is the largest factor used in calculating your credit score. Make use of that by paying all payments on time throughout the bankruptcy. Paying payments on time can also boost the average credit score after Chapter 13 discharge. 

If you are serious about improving your credit score while in Chapter 13, talk to your bankruptcy attorney about a secured credit card. You may not need bankruptcy court approval for a secured credit card since you place a deposit with the company to secure the charges each month. By using the secured credit card and paying the payments on time each month, you might also improve your credit score during Chapter 13. 

Will My Credit Score Increase After Chapter 13 Discharge?

In many cases, a person’s 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.

Will I have access to credit after Chapter 13 discharge?

You may be wondering whether you will have access to credit soon after the Chapter 13 discharge. Two writers from the Federal Reserve Bank of Philadelphia covered that topic in a research article titled, “Credit Access after Consumer Bankruptcy Filing: New Evidence” that may help answer the question.

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.

Are You Ready to Take Control of Your Debt?

How does Chapter 13 affect your credit in the future? It is really up to you whether to make the most of the fresh start you received from filing bankruptcy. 

If you are interested in taking control of your debt, why not get started with Ascend. The personal finance professionals at Ascend can help you review alternatives to bankruptcy or make the most of the fresh start you receive through bankruptcy.Some ways we help our clients overcome debt problems and take control of their personal finances include, but are not limited to:

  • Providing a convenient format for tracking all debt.
  • Managing debt and credit scores.
  • Using specialized processes to compare debt-relief options.
  • Providing personalized assistance for consumers searching for help with debts and finances.
  • Analysis of the pros and cons of various debt-relief options, including payment estimates, to help you make an informed decision.
  • Equip you to make the most of your fresh start once you are debt-free.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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