Yes, filing for bankruptcy can negatively affect your credit score. But Chapter 13 will also help you reorganize and repay your debts under a court-supervised repayment plan. Therefore, you can boost your credit score in Chapter 13 by repaying your debts. We will discuss how Chapter 13 can affect your credit score and how you can boost your score while still under Chapter 13 bankruptcy.
How Filing Chapter 13 Can Affect Your Credit Score
Filing for bankruptcy can affect your credit score, which keeps most people from filing for bankruptcy. However, not keeping up with your debts will also affect your credit score. The difference is you get a chance to boost your credit score if you file for bankruptcy, unlike if you continue ignoring your debts.
The Chapter 13 bankruptcy case will remain on your credit report for seven years. The drop in your credit rating is, however, temporary. How far your credit drops will depend on various factors—for example, your credit score before filing and the specifics of your case.
Since most people file for bankruptcy as a last resort, when you are struggling with debt, mortgages, and car loans, making late payments, maxing out your credit accounts, and having debt collectors chasing you, you have already dropped your credit rating. This negative information submitted by your lender will lower your credit score.
Once you file Chapter 13 bankruptcy, your rating will further drop as bankruptcy is considered negative information. However, since your credit rating is already poor from previous negative information submitted when struggling with debt, bankruptcy filing will have a negligible impact on your credit score. But if you are filing for bankruptcy with a good credit score, the report might affect your credit score greatly. Either way, the drop is temporary, and there are measures you can take to improve your credit score.
Why You Shouldn't Worry About a Drop in Your Credit Score After Filing for Bankruptcy
As we have said, the drop in your credit rating is temporary. When under Chapter 13 bankruptcy, you will catch up with your late payments, and continue making payments, even if it is a portion of the debt.
On completion of the plan, the court will discharge your unsecured debt. Thus, you will not have to repay the debts, and all your unsecured debts will have a zero balance. The reduced debt-to-income ratio will improve your credit score.
You can also rebuild your credit score in Chapter 13 and after bankruptcy. Use our free Chapter 13 to estimate how much your Chapter 13 repayment plan will cost.
How Chapter 13 Can Help Your Credit Score
Chapter 13 allows the debtor to repay their debts through a court-approved repayment plan. Since you will be making monthly payments to your creditor, your credit score will increase. As you make your payments, the balances on your loan account decrease, and your debt-to-income ratio decreases, boosting your credit score.
When calculating your credit score, payment history accounts for 35%, while outstanding loans account for 30%. So, mailing monthly payments towards your debt on time positively affects this factor, improving your credit score. Additionally, the automatic stay the court puts when you file for bankruptcy will prevent your lenders from collecting debts and reporting late payments to the bureau. Thus, helping your credit score.
4 Ways You Can Boost Your Credit Score in Chapter 13
Since a Chapter 13 bankruptcy case takes three to five years, you might want to work on your credit score while under the plan. Here are four ways to do so:
1. Make your payments on time.
Chapter 13 bankruptcy is suited for individuals with an income above the state media. Hence it is known as wage earners' bankruptcy. In Chapter 13, debtors propose a debt repayment plan to keep up with their debts. You must also catch up with outstanding arrears for secured lenders like car or mortgage loans. Most mortgage loans will not be included in the plan as car loans will, but you will continue making payments outside the plan. Ensure all your payments are made on time. This will improve your payment history and, consequently, your credit score.
2. Regularly analyze your credit report for errors and inaccuracies.
Your credit score could be damaged due to errors or inaccuracies reported by lenders. Therefore, regularly request your credit report from the three credit bureaus, and analyze the report. Should you notice any errors or inaccuracies, dispute the error and follow up to ensure it is corrected to improve your credit score.
3. Apply for a secured credit card.
You need to demonstrate your ability to manage finances and repay your debt. A secured credit card is a great place to start. You will need to deposit an amount equal to the car's maximum limit to avoid default. Depending on the bankruptcy laws in your state, a secured credit card may or may not be considered a new line of credit. So, consult a Chapter 13 bankruptcy attorney before applying. If your attorney gives you the go-ahead, inquire with your preferred credit card company on whether they report payments to credit bureaus. The goal is to work with a company that reports your timely payments to credit bureaus to build your credit score.
4. Obtain a new line of credit
Getting a new line of credit, using it reasonably, and making timely repayment can prove your financial discipline. However, you should not incur new debt while in Chapter 13 bankruptcy. Therefore, consult a Chapter 13 bankruptcy attorney before applying for a new line of credit, or it could risk the bankruptcy court dismissing your case.
Compare Your Options
Bankruptcy is not your only way out of debt. Other debt relief options include debt payoff planning, debt settlement, and debt management. Use our free debt relief calculator to compare these debt relief options. Our calculator is personalized to suggest the best option depending on your personalized financial situation. If you need help with your case valuation, contact us at (833) 272-3631, or engage us online for free help.