How Does Chapter 13 Affect Your Credit

If you are thinking about filing chapter 13 but you are curious how it will affect your credit
Information in this article does constitute legal advice, is for informational purposes only and may not constitute the most up-to-date information. Readers should contact their attorney for advice to any particular legal matter.

Filing Chapter 13 bankruptcy can help you eliminate debts and stop foreclosure or repossession. However, like anything else, there are some downsides to filing Chapter 13 bankruptcy, the major one being its effect on your credit score. Most debtors are afraid of filing bankruptcy because they fear the record will be made public and their credit score will be affected. 

While filing Chapter 13 bankruptcy will harm your credit score, chances are, if you are sinking in debt, your credit score has already been affected by the late debt payments and other actions from your creditors. 

What is a credit score, and how does filing for Chapter 13 bankruptcy affect your credit score? We will explain this in detail and debunk common myths that keep debtors from filing for bankruptcy.

FICO Credit Score: What is It and How is It Calculated?

What is it?

A credit score is a number between 300 and 850 generated by credit rating bureaus as a measure of your credit management. 300 is the lowest score, and 850 is the highest. A high credit score shows responsible credit management and, thus, makes it easy to obtain credit with better terms like lower interest rates. On the other hand, a low credit score shows questionable credit management, makes it difficult to obtain credit, and attracts high-interest rates on loans.

There are five main inputs considered in calculating the FICO credit score. Here are the five factors and the percentage of how much each factor affects your score.

  • Payment history- 35%
  • Debts- 30%
  • Credit history- 15%
  • Credit mix-10%
  • New credit applications- 10%

Credit actions like debt collection and a default judgment will lower your credit score, as will filing for bankruptcy. Fortunately, credit scores change constantly, and you can boost your score.

Whenever a credit reporting agency files new information on your debt, it will affect your credit score. It might either increase or decrease your score, depending on the information. So, once you file for Chapter 13 bankruptcy and notify your creditors, they might file new information regarding the debt, affecting your credit score. 

Note: The effect on your credit score will be different depending on your unique case. So filing for bankruptcy might affect your credit score differently than it affects another person. Do not base your judgment on someone else's experience.

By How Many Points Will My Credit Report Decrease If I File Chapter 13 Bankruptcy?

There are no specific points you will lose by filing for Chapter 13 bankruptcy. Therefore, you cannot know how many points you will lose. The drop will depend on your score before filing for bankruptcy. 

Nevertheless, people with higher credit scores are likely to experience a larger drop compared to debtors with good to poor ratings. While some sources claim your points might be reduced by 200 points if you have good credit, people with poor credit might see their score reduced by 100 points or less.

If you are about to declare bankruptcy, chances are the missed payments, and creditors' actions have reduced your credit rating. Therefore, your score might be reduced by a few points. But despite how many points you lose on your rating, the Chapter 13 bankruptcy case will remain on your report for only seven years. This is a relatively shorter time compared to a Chapter 7 case, where the case remains on the report for ten years. 

After filing for bankruptcy, most debtors see an increase in their credit scores as they catch up on missed payments and continue making repayments. Additionally, there are some measures you can take to repay your credit score. So, there is nothing to worry about. By the end of your plan, you will have made positive strides regarding your credit rating.

Tips to Improve Your Credit Score After Filing Chapter 13 Bankruptcy

A great place to start is to catch up with your payments and ensure you follow up with your payments as agreed. Your payment history accounts for 35% of your credit score, a considerable factor you can take advantage of. Timely payments will also help boost your credit score after your debts get discharged.

Discuss with your bankruptcy attorney the possibility of getting a secured credit card. A secured credit card can help build your history and improve your score. You cannot incur additional debt in bankruptcy, which makes it hard to rely on regular credit cards to improve your credit. Fortunately, you might not need the court to approve a secured credit card since you secure your charges. Nonetheless, it is important to discuss your possibilities with your attorney.

Will a Chapter 13 Discharge Help My Credit Score?

Usually, when someone receives a Chapter 13 discharge, their credit score increases. First, because on completion of your Chapter 13 plan, your insecure debt is forgiven. Therefore, your debt-to-income ratio decreases, improving your credit score.

Second, once you file bankruptcy and complete your plan, creditors cannot report negative information, e.g., reporting late payments on your account. Thus, with little negative information, your credit score will go up. 

Can I Qualify for a Loan After Chapter 13?

You should not take on new debt while in bankruptcy. Now that you know filing for bankruptcy will affect your credit score, you might wonder if you will be eligible for a loan after Chapter 13 bankruptcy. Here is an in-depth answer to this question provided by two writers from The Federal Reserve Bank of Philadelphia.

10 Ways You Can Improve Your Credit Score After Completing Chapter 13 Bankruptcy?

After successfully completing your Chapter 13 bankruptcy case, and receiving your discharge, use these ten tips to improve your credit score:

  • After your discharge, ensure all creditors include bankruptcy as discharged in the collection accounts
  • Download your credit report from the three credit reporting bureaus. Go through each report and ensure there are no report errors or account inaccuracies. All account balances should be zero. 
  • In case of any inaccuracies, let the agency know and follow up until they are corrected
  • Regularly check your credit reports at least once a year to check out for mistakes
  • Make your debt payments before time or on the due date. Remember, your payment history accounts for 35% of your credit score.
  • Be more vigilant about your finances. It is best to draft a budget to help you manage your finances, keep up with your expenses and avoid overspending
  • Do not take on debt unless you are sure you can repay it. This also applies to credit cards. Always start with a small credit card, and only spend what you can afford.
  • Open an emergency savings fund that you will use to handle financial emergencies and reduce the need to take on credit in future
  • Avoid overextending yourself
  • Apply what you learned in your bankruptcy courses to manage your finances and avoid debt.

Most debtors are worried about how they can remove bankruptcy from their credit reports. Experian offers information on this.

Know You Have Alternatives and Understand the Costs 

Chapter 13 bankruptcy records will remain on your credit score for seven years. So, before rushing to file, understand that you have other alternatives you can explore. Sometimes, depending on your case, these other alternatives can be better and cheaper. 

For example, you can opt for debt settlement or debt management. You can read more about How Debt Settlement Affects Your Credit and How Debt Management Affects Your Credit. You can then compare this to Chapter 13 bankruptcy and decide.

When making your decision, also consider the costs involved. Use this Chapter 13 bankruptcy calculator to estimate how much it may cost to file Chapter 13 bankruptcy. Our calculator is personalized to your state and will give results based on the bankruptcy forms in your state and your financial situation.

Get a Fresh Financial Start Today!

Debt can take a toll on your finances and mental health. You can get your fresh financial start today and get rid of debt with Ascend. We have a team of personal finance professionals who you can consult for free. Our professionals can help review your situation and different debt relief options and choose the best option. Our professionals can help:

  • Manage your debt
  • Compare different debt relief options using specialized processes and recommend the best based on your unique situation
  • Offer a convenient way to track your debt
  • Improve your credit score
  • Analyze debt relief options and estimate their costs to guide your decision
  • Give you tips on how to avoid falling back into debt after successfully helping you get rid of debt


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